RBA Could Return to Rate Hikes Next Year, Says CBA

Commonwealth Bank chief economist Luke Yeaman warned that the Reserve Bank of Australia could resume raising rates next year if price pressures remain elevated and employment tightens further, with a number of economists signalling the end of the RBA's easing cycle. Markets will focus on October inflation data for clarity on the trajectory of Australian monetary policy and rate expectations.

Analysis

Market structure: Expect a rotation toward rate-sensitive financials and away from long-duration, yield-sensitive assets. Australian major banks (CBA.AX, NAB.AX, WBC.AX, ANZ.AX) should see ~50–150bp potential NIM upside priced over 12–18 months if RBA pricing shifts to ~+25–75bp by H1 2026; A-REITs and residential developers will underperform as 10y+ duration reprices. Bond supply/demand will tighten at the front end (2-5y) pushing yields higher and curve steepening if markets price in a >25bp tightening path.

Risk assessment: Tail risks include a policy error that triggers a sharp housing downturn or an external demand shock (China slowdown) which would blow out non-performing loans and reverse bank rallies; probability low-medium but impact high. Immediate: price moves around October CPI (days); short-term (weeks–months): RBA communications and wage prints; long-term (quarters): cumulative hikes that affect credit growth and asset values. Hidden dependency: labour participation and wage growth trajectories — if wages accelerate >4% y/y, hike odds jump materially.

Trade implications: Direct: prefer long large-cap banks and short A-REITs and long-duration equities; use 2y ASX futures to express front-end rate moves and buy AUD vs low-yield currencies to capture carry/FX re-rate. Options: use call spreads on CBA.AX/NAB.AX to limit upside risk and buy put spreads on VAP.AX (Vanguard Australian Property ETF) for A-REIT downside around CPI prints. Timing: size up within 3 trading days of CPI print if CPI surprise >0.1pp to consensus or if market-implied RBA hikes move >25bp.

Contrarian angles: Consensus may underprice credit-cycle risk — bank NIM gains could be offset by higher provisioning if unemployment creeps +50–75bp. Conversely, markets may overstate RBA hike magnitude if global disinflation resumes: if US CPI softens and 2y AU yields fall >30bp, rotate back into long-duration REITs/tech. Historical parallel: 2010–12 pauses show central banks pause after small labour shocks; don’t assume a mechanical tightening path without persistent wage/inflation evidence.

Key Decisions for Investors

• Establish a 2–3% long position in CBA.AX and a 1.5–2% long in NAB.AX (equal-weighted), using 3–6 month call spreads to cap cost; increase if market-implied RBA hikes for H1 2026 rise by >25bp.
• Initiate a 1.5–2% short position in VAP.AX (Vanguard Australian Property ETF) or short leading A-REITs (e.g., MGR.AX) using 3-month put spreads sized for a 10–20% downside if CPI prints >consensus or 2y yields rise >30bp.
• Short ASX 2-year government bond futures (or buy protection via 2y Treasury yield swaps) targeting a 20–40bp rise in short yields over 3–9 months; cut if 2y yield falls >25bp from entry.
• Take a directional FX trade: go long AUD/JPY sized 0.5–1% of portfolio via spot or 3–6 month call options on AUD with a 3–5% appreciation target; enter if market-implied RBA hike probability for next 12 months increases by >20 percentage points.