Outlook for Interest Rates This Year

Early last year, the consensus view was clear: interest rates were expected to keep drifting lower through 2026. Inflation was easing, growth was slowing, and many believed the tightening cycle was behind us.

More recent labour market data has highlighted just how resilient the Australian economy remains, prompting a reassessment of interest rate expectations.

In the latest figures, employment growth significantly exceeded forecasts, pushing the unemployment rate down to around 4.1 per cent, close to its lowest level in decades. Importantly, the bulk of the jobs created were full-time roles, rather than the temporary or part-time positions often seen during seasonal hiring periods.

That detail matters. A labour market generating strong, full-time employment suggests the economy is still running warmer than many had assumed, increasing the risk that inflation pressures linger for longer.

Markets responded accordingly. Expectations for a Reserve Bank of Australia (RBA) rate increase in the coming months have lifted, with traders now assigning a materially higher probability to another hike than they were only weeks earlier.

Why the RBA Is Paying Close Attention

The Reserve Bank has been consistent in its messaging. While inflation remains the primary focus, a tight labour market raises the risk that inflation proves more persistent, particularly through wages.

These are not signals of an economy under strain. They point to one that continues to show momentum.

That said, strong employment alone does not determine interest rate decisions. Inflation data remains the deciding factor, and the RBA will be watching upcoming releases very closely.

What This Means for Households and Investors

For households, this shift is a reminder that rate cuts are no longer a one-way expectation.

For investors, the lesson is familiar but important. Markets constantly reprice expectations, often quickly and on limited information. Long-term outcomes are shaped far more by discipline, diversification and sticking to a plan than by trying to anticipate central bank decisions.

For self-funded retirees, higher interest rates can be more supportive. Rising deposit and fixed interest rates may improve income.

The Bottom Line

Interest rates may yet rise again, not because something has gone wrong, but because the economy has remained stronger than expected.

As always, the challenge isn’t forecasting the next move.
It’s having a strategy that works regardless of which way rates go next.