In what could be a blow for retailers who are faciung a tough first quarter in 2026, Investors continue to price in a low chance of an interest rate increase at the Reserve Bank’s early February meeting, but the economic backdrop is making that confidence look increasingly fragile. A move higher after the February 2-3 policy gathering would still shock markets, yet a string of stronger-than-expected indicators has complicated the outlook and forced policymakers to weigh inflation risks against weakening sentiment.

Although market pricing now implies only a slim chance of a 25 basis point rise, down markedly from earlier in the month, the case for tighter policy has not disappeared. Softer November inflation figures, cautious public remarks from deputy governor Andrew Hauser and a slump in consumer confidence helped push expectations lower. Even so, forecasts from NAB and CBA for a rate hike mean the prospect cannot be dismissed.

Beneath the surface, household demand appears far more resilient than the RBA had anticipated. Consumer spending has surged to its strongest pace in more than two years, reigniting fears that the economy may be running hotter than is consistent with inflation returning to target. Official data showed household spending rose 1 per cent in November, lifting annual growth to 6.3 per cent, the fastest since late 2022. That momentum carried into December, with CommBank’s spending index posting another solid monthly increase and maintaining the same annual pace.

Economists have been forced to reassess. JPMorgan’s Tom Kennedy said the consumption figures significantly outperformed expectations, marking the strongest back-to-back months since the post-lockdown rebound. He believes household spending grew well above the RBA’s modest forecast for the December quarter, suggesting upcoming official projections may need to be revised higher.

Much of the surge was driven by aggressive discounting around extended Black Friday and Boxing Day sales. Westpac’s card data showed transaction volumes over the seven-week period rose at the fastest rate since 2021. At the same time, households appear to have rebuilt savings buffers, indicating spending strength has not come at the expense of financial resilience.

CBA’s head of Australian economics, Belinda Allen, said the lift in consumption late last year was stronger than expected and pointed to households being more willing to spend despite higher interest rates. That resilience, she warned, risks pushing the economy beyond its sustainable pace and marginally strengthens the argument for a February rate increase.

Veteran market watchers are also shifting their stance. GSFM investment specialist Stephen Miller, previously sceptical of the need for tighter policy, now sees inflation as an immediate threat. He argues that even a modest rise in trimmed-mean inflation could push the annual pace above the RBA’s forecast, especially given solid labour market conditions and rebounding demand.

Miller also highlights broader structural issues, noting that unit labour costs remain elevated and inconsistent with the central bank’s inflation target. In his view, a lack of meaningful productivity reform has left monetary policy carrying too much of the burden.

The RBA now faces an uncomfortable choice. NAB and CBA expect a move higher next month, while Westpac, ANZ and most economists believe the bank will hold steady and wait for clearer evidence on inflation trends. The decision is likely to hinge on two crucial data points, the December quarter inflation report due on January 28 and the January employment figures released the following day.

The timing is awkward. Consumer confidence has slipped further, suggesting households are already uneasy about the prospect of higher borrowing costs. Yet the RBA’s mandate prioritises price stability over sentiment. With spending accelerating, jobs holding firm and inflation proving stubborn, the economic signals are edging closer to a rate rise, even if markets are not fully convinced yet.