Analysts were blindsided when the Australian Bureau of Statistics revealed on Wednesday consumer prices rose by a higher-than-expected 3.8 per cent in the 12 months to October.
The result shook markets, which up until a few months ago had been expecting the central bank to lower the cash rate once or twice from its current level of 3.6 per cent.
A recent resurgence in price pressures had tempered expectations, but on balance, traders still thought another move down was more likely than a move up.
The rates market had been pricing in about 12 basis points of cuts in 2026 ahead of the "red-hot" inflation data, IG market analyst Tony Sycamore said.
"It goes out pricing in roughly 12bp of rate hikes for 2026," he said.
That boosted the Aussie dollar against the greenback but spooked equities investors, with the ASX200 retreating about 40 points after the news.
The fact that growth is in an upswing and inflation is rising suggests the cash rate is not slowing the economy down, HSBC chief economist Paul Bloxham said.
"For the RBA, today's figures should be concerning," he wrote in a research note on Wednesday.
"A debate can be had about whether the RBA has already cut its cash rate too far.
"Our central case sees the RBA on hold through 2026, with the rate hikes beginning in early 2027. Today's print adds to the risk that rate rises could be needed earlier than that."
Analysts at investment banks Barrenjoey and UBS tipped the Reserve Bank to raise rates in 2026 following the print, but economists at ANZ and Westpac were still holding onto their predictions for at least one more cut in 2026.
JP Morgan analyst Tom Kennedy said while the upside surprise meant there was clearly a risk that inflation could overshoot the Reserve Bank's forecasts, he did not think it was "sufficient for rate hikes to creep into the RBA's internal discussion".Â
"We continue to see the RBA on hold through 2026, with hikes likely from early 2027," he said.
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