‘Awkward position’: Inflation returns at the worst time for economy

Cash-strapped mortgage holders won’t get any rate relief in 2026, even as Australia’s unemployment rate is predicted to spike. The grim call comes from Oxford Economics Australia which describes the economy in an “awkward position”, with inflation re-accelerating at a time when growth remains unbalanced across the economy and household finances are fragile. Harry Murphy Cruise, of Oxford Economics Australia, said the Reserve Bank of Australia (RBA) will hold interest rates throughout the year. “With inflation back above target and domestic demand surging, rate cuts are off the table for 2026,” the head of economics research and global trade said. “We think the RBA will choose patience.” Mr Murphy Cruise said Australia’s inflation rate resurgence caught experts off guard, with a surprising spike in consumer spending before an inflationary pick-up. The pick-up in demand came at the same time as subsidies for electricity ended and tobacco, childcare fees and local government charges all jumped. These are not prices the RBA can nudge with interest rates. “As recently as August, both we and the RBA expected trimmed-mean inflation to be comfortably around the midpoint of the target band by year-end. That clearly didn’t happen,” Mr Murphy Cruise said. But, according to the forecast, mortgage holders will be spared further rate pain, as interest rates will be left on hold due to a weakening labour market. The RBA has a dual mandate to keep inflation between 2 to 3 per cent, while also maintaining full employment. Oxford Economics states unemployment will rise by around 30 basis points from 4.3 to 4.6 per cent which, according to their modelling, will effectively deliver the same fall in inflation as an interest rate hike. NED-9108-Monthly-Inflation-Indicator The Australian Bureau of Statistics says Australia’s unemployment rate has remained steady at 4.3 per cent for five of the last six months. “The combination of still restrictive rates and higher unemployment will push underlying inflation down to 2.8 per cent by the end of the year and return to the middle of the target band by 2027,” said Mr Murphy Cruise. “The economy’s recent resilience suggests the current cash rate is less restrictive than we previously assumed. As a result, we’ve raised our estimate of the neutral rate to 3.35 per cent — from 3.1 per cent.” Mr Murphy Cruise said the labour market is showing signs of softening. “Working age participation is edging lower, underemployment is drifting higher, and forward indicators such as job ads suggest firms are becoming more cautious about hiring.” Official figures from the ABS show full-time employment fell by 57,000 people in November, which was offset by part-time employment rising. Separate survey data from LinkedIn shows Australians are fearful about their jobs and have started a new trend of “job hugging” as they look to stay in a role that might no longer meet their needs. What the big banks say about interest rates In separate rate calls, the big four banks are divided on the direction of interest rates. Commonwealth Bank and NAB both are saying interest rates will rise by 0.25 per cent in February, while NAB predicts another interest rate rise will happen in May. Westpac and ANZ are both currently predicting the cash rate will remain the same for 2026. A rate hike of 0.25 per cent represents an approximately $90 increase per month to an owner-occupier with a $600,000 debt on a 25-year mortgage. The RBA will meet in February to discuss a potential rate hike, with the next announcement due on February 3 at 2.30pm.