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Australia’s inflation and monetary policy outlook remains one of the most scrutinised macroeconomic debates heading into early 2026. Financial markets are increasingly focused on where the Reserve Bank of Australia (RBA) stands in its inflation fight, the potential role of the Australian dollar (AUD), and the implications of the next monetary policy decision scheduled for later today (3 February 2026).

According to the RBA’s official calendar, the Monetary Policy Board meeting concludes on 3 February, with the cash rate decision and accompanying Statement on Monetary Policy released at 2:30pm AEDT.

Late-2025 inflation readings have been a central driver of shifting expectations. The consumer price index (CPI) rose by 3.8% in the year to December 2025, up from 3.4% in November, with core measures such as the trimmed mean also elevated above the RBA’s mid-point target band of 2–3%. These outcomes exceed most forecasts and underline the persistence of price pressures in areas such as housing, rents and electricity.

Inflation’s Resurgence and Market Expectations

The uptick in inflation late last year has elevated the likelihood that the RBA will adjust its monetary stance at its first policy meeting of 2026. Following the release of the inflation data and supporting labour market indicators, including a decline in the unemployment rate, financial markets have increasingly assigned a higher probability to a 25 basis-point increase in the cash rate at the February decision.

Analysts widely view this move, if it occurs, as responsive to inflation metrics that have remained above the RBA’s target range for much of the past year. While some forecasts remain cautious on the prospect of multiple hikes, the elevated trimmed mean and headline CPI have created sufficient pressure to challenge the narrative of imminent rate cuts that prevailed earlier in 2025.

The strength of the Australian dollar has also entered the debate around inflation and policy. A stronger currency can, in theory, ease imported inflation by lowering the cost of foreign goods in local terms. This mechanism can influence headline inflation outcomes even as domestic price pressures remain elevated. Throughout January 2026, the Australian dollar gained ground to levels not seen in several years, briefly exceeding US$0.70, which market participants interpreted as both a reflection of RBA tightening expectations and a moderating factor on price pressures.

The interplay between a resilient currency and sticky inflation presents the RBA with a complex backdrop. A stronger dollar can dampen some inflationary pressures by making imports cheaper, yet underlying domestic price dynamics have continued to surprise on the upside, leaving policymakers to balance external and internal influences on inflation and economic growth.

Equity Markets and RBA Expectations

Equity market performance has mirrored the evolving policy outlook. In the run-up to the anticipated RBA meeting, the ASX 200 has shown increased sensitivity amid expectations of a potential rate increase, as higher interest rates typically compress equity valuations by raising discount rates and increasing the cost of capital for businesses.

This sensitivity reflects broader market positioning, with investors adjusting portfolios in anticipation of an aggressive shift from the RBA after a period of relative stability in rates. Market movements also underscore the influence of domestic monetary policy expectations on risk sentiment and investment flows.

Housing and Broader Economic Signals

Housing market data provides additional context for the inflation narrative. In some of Australia’s largest cities, including Sydney and Melbourne, house price growth has shown signs of flattening as the effects of earlier rate increases and tighter lending conditions begin to manifest.

A cooling housing market can help alleviate inflationary pressures over time by reducing upward momentum in rents and related costs, although the transition tends to be gradual. Beyond inflation, slower house price growth can influence household wealth effects, consumption behaviour and credit conditions, making housing a key variable in the broader monetary policy transmission mechanism.

The BPC View

The near-term policy outlook for the RBA remains finely balanced. Recent inflation data, currency strength and moderating housing indicators present mixed signals, reinforcing the importance of upcoming monetary policy decisions. With the RBA’s February and March 2026 meetings approaching, markets are likely to remain sensitive to incremental data releases and central bank communication. The interaction between inflation persistence, exchange rate movements and domestic demand will continue to shape expectations across equities, property and credit markets as Australia moves through the first half of 2026.

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