Commonwealth Bank of Australia (ASX: CBA) economists are taking a fresh look at what ASX investors and mortgage holders can expect from interest rates in the year ahead.
This follows Wednesday's unexpected, and decidedly unwanted, inflation report.
As you're likely aware, yesterday the Australian Bureau of Statistics (ABS) reported that the Consumer Price Index (CPI) increased by 3.8% in the 12 months to December. That marked a surprising 0.2% increase from the 3.4% CPI print in the 12 months to November.
And potentially impacting the RBA's interest rate decision when the central bank meets again next Tuesday, 3 February, trimmed mean inflation (the RBA's preferred gauge) edged up to 3.3% from 3.2%. That's well above the midpoint of the RBA's target range of 2% to 3%.
Overnight, ASX investors also learned that the US Federal Reserve opted to keep rates in the world's biggest economy on hold for now at 3.50% to 3.75%.
The official cash rate in Australia currently stands at 3.60%.
But is it set to move higher?
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What CBA now expects the RBA to do with interest rates
Cutting straight to the chase, in a report released on Wednesday, CBA noted:
The Reserve Bank of Australia is widely expected to increase the cash rate by 25 basis points to 3.85 per cent when it meets next week, following a surprise uptick in underlying inflation.
"The latest inflation data confirms that price pressures, while easing, are still too high," Belinda Allen, head of Australian economics at CBA said.
As for higher interest rates, she added, "The accumulation of evidence supports our view that a cash rate hike is needed to ensure inflation returns to the midpoint of the target band by the end of 2027."
The S&P/ASX 200 Index (ASX: XJO) bank also pointed to the strength of the Aussie jobs market.
The unemployment rate declined to 4.1% in December, amid an ongoing increase in employment.
According to CBA economists, a tightening jobs market could put upward pressure on wages, making the RBA's inflation battle more difficult.
Robust household consumption, up 2.8% in 2025, could also push the RBA towards increasing interest rates next Tuesday.
"These areas of strength suggest the economy has more momentum than the Reserve Bank anticipated just a few months ago," Allen said.
"We expect the RBA to lift the cash rate by 25bp to 3.85% next week," she said.
Allen concluded, "The RBA's reaction function is the wild card with uncertainty over the board's urgency to hike."
