Australians warned to brace for double interest rate hike in new year as dollar surges to 14-month high

Millions of Australians are set to pay more in the new year, as the Australian dollar is set to surge to its highest level in four years. In unwanted news for mortgage holders and a boost to savers, interest rates are tipped to rise twice in the new calendar year, bringing with it a rising local dollar. IG market analyst Tony Sycamore told NewsWire the Australian dollar traded at a 14-month high on Monday as the money markets bank on a potential interest rate hike as soon as February. “There has been a shift over the past three or four weeks towards rate hikes in Australia,” he said. “If we look at where the rates market is looking by the end of 2026, we are expecting the official cash rate to be around 4 per cent, while the US will be between 3 to 3.25 per cent.” If the forecasts are proven correct, interest rates in Australia will be nearly 0.75 to 1 per cent higher in Australia than the US. Keeping other things equal, the divergence in rates will force the Australian dollar higher than the US dollar. AMP chief economist Shane Oliver says Australia’s rising inflation rate is concerning the Reserve Bank of Australia (RBA), as it unexpectedly jumped in October. The Australian Bureau of Statistics data shows the inflation rate for October remains unchanged at zero per cent. However, due to the -0.2 per cent figure in October last year, Australia’s yearly inflation rate has now jumped to 3.8 per cent. “Some central banks are either at or close to the bottom on rates,” Mr Oliver said. “And in Australia, inflation has worsened lately which could see the RBA hike prematurely. “Money market expectations for two hikes next year, potentially starting as early as February, would snuff out the consumer recovery.” Mr Oliver conceded even with a rising inflation rate and dollar, Australia’s issues were a “non-event” compared with the rest of the world. RBA governor Michele Bullock also conceded interest rates were more likely to rise than be cut. In grim news for mortgage holders, the RBA top boss was asked if the bank considered either cutting or hiking interest rates in December. “We didn’t consider the case for a rate cut at all and we didn’t explicitly consider the case for a rate rise at this meeting,” she said. “But we did consider and discuss quite a lot of the circumstances and what might need to happen if we were to decide interest rates had to rise again next year.” Mr Sycamore says the Australian economy is holding up, allowing the central bank to lift rates to fight inflation. “The Australian economy has done better than expected, the labour market has stayed resilient, growth has picked up and household spending is showing signs of improvement,” he said. “The one drawback is inflation, which is not a good thing but it is probably a good thing for the Aussie (dollar) as the RBA is more likely to hike interest rates.” At the same time the US dollar is “out of favour” with investors, as interest rates fall overseas. Mr Sycamore forecasts the Aussie dollar will jump to 69.5 US cents by mid 2026, while Mr Oliver estimates the Australian dollar will surge to 73 US cents by the end of the year. If predictions come true, the Australian dollar will surpass a four-year high of 72 US cents. The last time the dollar was buying 72 US cents was June 2022. Aussie spenders the big winners Offsetting the higher costs for mortgage holders, there are benefits for shoppers and travellers of a higher Aussie dollar. Mr Sycamore says it won’t have an impact on corporate Australia, which will hedge the risks away, but it will help local consumers. “As a consumer here in Australia you’re doing better because you’re getting more bang for your buck for your overseas items, such as cars, TVs, phones may be a little cheaper,” Mr Sycamore said. “It is an Aussie, US story but there are other currencies it (the Aussie dollar) has done well against including the Japanese yen. “This is the sixth year it has gained against the yen.” He also noted Korea and China as other currencies where the Australian dollar had appreciated. These countries are largely pegged against the US. Meanwhile, the Australian dollar continues to fall against the Euro and has for four years in a row. “So we are currently sitting around 56.50ish and we started the year close to 60 cents. If you are going to Europe, you are not having such a good time,” Mr Sycamore said. “If anyone is planning on going overseas in 2026, there are certainly some places that will be cheaper, including Asia and the US, while it’s not so good for a European trip.”