Stubborn inflation exceeds expectations! Two major banks issue heavy warnings: the Australian Reserve Bank will return to raising interest rates in February next year.

Australia's two major lending institutions said on Tuesday that they expect the Reserve Bank of Australia to resume raising interest rates in February next year to address ongoing price pressures in the economy. The Commonwealth Bank of Australia currently predicts a single rate hike next year to 3.85%, but economist Belinda Allen believes there is a risk of a "greater tightening cycle" if economic growth has more momentum and inflation is more sustained. NAB's chief economist Sally Auld expects two rate hikes - one in February and one in May - to bring the terminal rate to 4.1%. After cutting rates three times in August, the RBA has kept rates unchanged at 3.6%. RBA Governor Michelle Bullock warned last week that if price pressures prove to be stubborn, the next likely action would be a rate hike. After inflation in the third quarter exceeded the upper limit of its 2-3% target range, the RBA took a data-dependent stance. Allen said, "The RBA's reaction function has become clearer, with the threshold for rate hikes lower than previously expected." She added, "The apparent shift towards tightening in December was greater than we expected, especially after taking a more dovish stance in November." NAB's Auld expects the core inflation rate for the fourth quarter, to be announced at the end of January, to rise by 0.9% compared to the previous three months. She said this would mean that the core annual inflation rate has been at or above 3% for five consecutive quarters. This is 15 basis points higher than the RBA's latest forecast. Auld said in a report to clients, "Given the concern already expressed by the central bank about upward risks to inflation and the uncertainty about the current policy stance, we believe the RBA needs to moderately recalibrate monetary policy in the first half of this year." Financial markets imply a one-third chance of a rate hike in February and an 80% chance in May. Economists are divided on this: some institutions like ANZ Bank predict rates will remain unchanged, a few like Westpac predict a rate cut, while others predict a rate hike. Allen from the Commonwealth Bank said that a rate hike in February is necessary to "help the economy rebalance and bring inflation back to target levels," although a large tightening cycle is unlikely. Weak productivity growth has lowered Australia's potential economic growth rate, meaning inflation could rise faster when economic activity strengthens. This suggests that borrowing costs need to be maintained at higher levels than in previous cycles.