Financial markets are now pricing in a 100% chance the Reserve Bank will hike rates in 2026, in what would be a blow to mortgage holders but may take some steam out of an overheating property market.

The latest forecasts represent a turnaround from just two weeks ago, when traders were factoring in an even chance that the next RBA move would be a cut by its May meeting.

It comes as data showed inflation is now moving in the wrong direction, alongside this week’s national accounts and household spending figures which showed the economy is accelerating into the new year.

Adam Donaldson, the head of interest rates strategy at the Commonwealth Bank, said “the market has come to the conclusion that the Reserve bank won’t be cutting rates any further”.

“Basically, from February onwards, the market is starting to price some risk that rates will go up.”

Data from the Australian Bureau of Statistics showed consumer price growth jumped to 3.8% in the year to October – far higher than expected, and well above the top end of the central bank’s 2-3% target range.

The pain of higher mortgage costs would be a particular blow to the more than 85,000 first-home buyers this year who have enjoyed three rate cuts in 2025 but now face the prospect of higher repayments.

Sally Tindall, the director of data insights at Canstar, said there was a dwindling number of banks offering loans at interest rates of below 5%, and that she expected fixed rates to climb higher from here as banks factored in the shifting expectations around the RBA’s cash rate.

While outsmarting the banks was a hard task, Tindall said it was possible that fixing your mortgage at the lowest possible rate could work out for borrowers.

“If it suits your finances, right now, based on current forecasts, wouldn’t be the silliest time to fix – but the key is to shop around.”

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Three rate cuts this year have helped drive a rapid rise in home prices that has pushed affordability to its worst on record.

As first-time buyers rushed to take advantage of the federal government’s expanded 5% deposit scheme, property investors have flooded into the market.

Analysts at Westpac this week said they now expected property prices nationwide to rise by about 8% in 2025, and by as much as 14% in Brisbane and Perth.

But the changed outlook for interest rates means that instead of accelerating to 9% next year, national home values should instead climb by 6% – only cold comfort to those struggling to get on the property ladder.

All eyes now turn to Tuesday, when the RBA will deliver its final rates decision for 2025 and before the January break.

Analysts are confident the central bank’s board will hold the cash rate at 3.6%, but will be looking for any pushback against the financial market’s recent “hawkish” outlook.

While traders have moved swiftly to switch from predicting rate cuts to hikes, most economists believe the RBA is more likely to hold through 2026.

AMP’s chief economist, Shane Oliver, has “decided to give up on our view of another cut”.

But Oliver believes financial markets are overestimating the chance of higher rates.

Unemployment is trending higher, he said, which means the jobs market is still “a little bit soft”.

“There’s uncertainty around the reliability of the new monthly consumer price index, and consumer spending seems very dependent on getting discounts, which suggests a degree of fragility.”