The Reserve Bank of Australia (RBA) says financial markets have shifted to pricing in rate rises, as policymakers debated whether monetary settings remain restrictive following a run of stronger domestic data.
Minutes from the RBA’s December meeting show board members discussed a significant rise in market-implied expectations for the policy rate in recent months, marking a clear change in sentiment. Markets have moved from pricing in a further 25 basis point cut by the end of 2026 to now expecting a 25 basis point increase.
The minutes noted the repricing had been smooth and progressive, reflecting a series of data releases indicating the domestic economic outlook had strengthened, while risks to the global economy had eased.
“Members noted that this latest shift was in response to both communication by the RBA and the release of data on inflation, the labour market and GDP,” the minutes said.
Reassessment of policy
Markets interpreted those data as signalling building capacity constraints and rising inflationary pressures, prompting a reassessment of the future policy path.
The RBA said movements in long-term sovereign bond yields had broadly mirrored changes in policy rate expectations in Australia and overseas. In particular, the rise in short-term bond yields was consistent with investors anticipating a tighter monetary policy outlook and higher near-term inflation.
However, the central bank added that long-term inflation expectations remained anchored, suggesting confidence the board would act if inflation risks intensified.
“Market measures of long-term inflation expectations had remained consistent with the inflation target,” the minutes said.
Restrictive conditions?
Board members also debated whether financial conditions remain restrictive, with views split.
Some members judged that, on balance, conditions may no longer be restrictive, pointing to aggressive competition among banks to lend, low risk premia in capital markets and a strong housing market response to policy easing earlier in the year.
Other members took a more cautious view, assessing that financial conditions were still slightly restrictive, placing greater emphasis on the gradual rise in the unemployment rate over 2025.
The RBA noted the full impact of three rate cuts delivered in 2025 was yet to be realised, while adding that the recent increase in government bond yields would be a key consideration when assessing the outlook in the February 2026 forecasts.
The board held the cash rate at 3.6% at the December meeting, a decision described in the minutes as hawkish, reflecting ongoing uncertainty around inflation dynamics and the balance of risks.