Inflation May Force Reserve Bank to Hike Rates Twice

Published: 25 February 2026. The English Chronicle Desk. The English Chronicle Online.

The Reserve Bank of Australia could raise interest rates twice in 2026 as inflation remains stubbornly high. Annual inflation held at 3.8% in January, driven largely by the cessation of government electricity subsidies, which sent household power bills nearly a third higher than last year. The abrupt end of federal and state rebates caused a rapid spike in headline inflation, doubling it in just over six months. Even stripping out these volatile energy costs, the underlying measure preferred by the central bank rose to 3.4% in January, slightly higher than 3.3% in December.

Treasurer Jim Chalmers acknowledged on Wednesday that inflation was “higher than we’d like and for longer than we’d like,” warning that households could face continued cost pressures. He emphasized that the upcoming May budget would address both inflation and productivity, particularly against the backdrop of persistent global economic uncertainty. The latest figures revealed that inflationary pressures extended across many unavoidable household costs, highlighting the strain on Australian families.

The Australian Bureau of Statistics reported rents climbed 3.9% in the year to January, while medical and hospital services rose by 4.2%. Home building inflation accelerated to 3.5%, up from 3% in December, reflecting continued high construction costs. Stephen Smith, a partner at Deloitte Access Economics, described these pressures as the “political payback of a populist policy” by governments subsidizing energy prices from mid-2023. He warned that unless the federal budget delivers meaningful economic and tax reforms, growth could stagnate and inflation might persist longer than necessary.

Jo Masters, chief economist at investment bank Barrenjoey, suggested there were warning signals that inflation could prove more persistent than many anticipated. She projected a potential rate hike in August, following an expected increase in May, which would reverse much of the monetary relief delivered by the Reserve Bank in 2025 and return the cash rate to 4.35%. Analysts pointed to an unemployment rate of 4.1%, accelerating domestic demand, and high labour costs amid low productivity as indicators that the economy was operating beyond its sustainable capacity.

The Reserve Bank’s concern over inflation comes as consumer prices continue to rise in everyday essentials. Energy, housing, and healthcare costs remained the biggest contributors, with families facing higher utility bills and medical expenses that show no immediate signs of abating. Even though global economic growth has moderated, domestic pressures have persisted, fueled by ongoing labour cost increases and constrained supply chains. Economists emphasized that these factors made a pre-budget rate hike a credible possibility.

Financial markets quickly reacted to the ABS inflation figures, boosting the probability of a May rate increase to 95% from 84% prior to the release. The likelihood of a second hike later in 2026 climbed from around 40% to 60%, reflecting investor expectations that inflationary pressures may require stronger central bank intervention. Observers noted that the combination of slow productivity growth and rising costs represented a challenging environment for policymakers attempting to balance economic expansion with price stability.

Consumer sentiment surveys also highlighted concerns over rising living costs, with households reporting higher expenditures on essentials and discretionary items alike. The enduring strength of inflation, even after removing volatile energy prices, suggested that broader structural factors were at play, including tight labour markets and elevated demand for services. Smith warned that without significant reforms, inflation could remain entrenched, prolonging pressure on interest rates and households alike.

Housing costs have been a particular area of concern, with rents rising at rates well above inflation and construction costs continuing to climb. These pressures are compounded by ongoing labour shortages in the construction sector and higher materials costs, creating a challenging environment for both homebuyers and renters. Analysts warned that unless policies are carefully targeted, these trends could continue to exacerbate cost-of-living pressures across the country.

The Reserve Bank’s cautious approach reflects an awareness that rapid or excessive rate hikes could dampen economic growth. However, the persistence of inflation across multiple sectors may leave the central bank with little choice but to act decisively. Economists and market participants alike are closely monitoring wage growth, employment trends, and consumer demand for signs that inflation is beginning to moderate.

Chalmers stressed that the May budget would not only aim to manage inflation but also focus on long-term productivity improvements. The government faces a delicate balancing act, attempting to support growth while containing price pressures that affect millions of Australians. If structural reforms are implemented effectively, they could ease inflationary pressures over time, reducing the need for repeated interest rate increases.

Despite the pressure, there is cautious optimism that targeted fiscal policies and productivity enhancements could help stabilise prices without triggering a broader economic slowdown. Investment in infrastructure, support for industries facing supply constraints, and reforms aimed at improving efficiency could collectively mitigate inflation while fostering sustainable growth. Economists noted that the next few months would be crucial for policymakers, investors, and households alike.

In summary, the Reserve Bank is poised to potentially raise interest rates twice in 2026 as persistent inflationary pressures show no signs of easing. Rising energy, housing, and healthcare costs continue to strain households, while underlying inflation measures have edged higher, signalling broader challenges. Financial markets are increasingly pricing in multiple rate hikes, reflecting the central bank’s mandate to maintain price stability amid constrained productivity growth and robust domestic demand. With the May budget approaching, the government faces critical decisions to address both short-term inflation and long-term economic reform needs, balancing policy intervention with sustainable growth.

The focus on inflation, particularly in essential sectors, indicates that households and policymakers will navigate a challenging year ahead. Careful fiscal management and effective structural reforms could play a key role in easing cost pressures, but the trajectory of interest rates remains a central concern for Australian families and businesses. As the year progresses, attention will focus on both Reserve Bank actions and the federal budget’s ability to address entrenched price pressures, supporting economic stability and sustainable growth.

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