This article analyses the latest phase of RBA rate hikes and the divergence emerging between monetary policy and forward-looking inflation sentiment. Drawing on Permutable’s real-time sentiment data, it highlights potential over-tightening risks and shifting macro narratives. Aimed at institutional investors, macro strategists, and commodities traders, it provides early signals for positioning across rates, FX, and inflation-sensitive assets.
Australia’s monetary policy cycle has re-entered tightening territory, with RBA rate hikes reshaping expectations across global markets. However, beneath the surface, forward-looking sentiment signals suggest the macro narrative may already be shifting beyond peak inflation.
Through most of 2025, the Reserve Bank of Australia held the cash rate steady at 3.60%, despite mounting speculation around an eventual easing cycle. Our real-time macroeconomic sentiment data during that period showed a clear bias: interest rate expectations were firmly tilted toward cuts, with conviction building across institutional and media narratives.
That positioning has since been decisively unwound.
From easing consensus to RBA rate hikes
As inflationary pressures proved more persistent than expected, sentiment began to reprice the policy path. This shift developed progressively across Q4 2025, signalling a structural change in expectations rather than a short-term reaction. By March 2026, the RBA had delivered consecutive RBA rate hikes, taking the cash rate to 4.10%.
Our interest rate sentiment indicators now sit near historical highs, reflecting a market that has fully transitioned from anticipating easing to pricing in a sustained hawkish stance. This repricing underscores how rapidly macro narratives can reset when inflation dynamics shift.
From an analytical perspective, tracking sentiment provides an early signal – capturing inflection points before they become consensus.
Above: Interest rate sentiment has sharply repriced in line with recent RBA rate hikes, moving from expectations of easing to a firmly hawkish stance.
Inflation sentiment diverges from RBA rate hikes
While RBA rate hikes have intensified, the inflation narrative is no longer moving in tandem.
Headline CPI accelerated through much of 2025, reinforcing the case for tighter policy. However, our inflation sentiment data tells a more forward-looking story. Inflation sentiment peaked earlier – in September 2025 – and has declined steadily since, turning negative in recent weeks.
This divergence suggests that while realised inflation justified recent RBA rate hikes, expectations are already shifting toward disinflation. In effect, markets may be looking through current inflation prints and beginning to price a moderation in price pressures.
Above: Australia’s inflation sentiment peaked ahead of realised CPI and is now trending lower, suggesting price pressures may be easing even as RBA rate hikes continue.
A late-cycle divergence markets cannot ignore
What we are observing is a classic late-cycle dynamic:
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Policy action: increasingly hawkish via continued RBA rate hikes
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Forward-looking inflation sentiment: softening
Historically, this type of divergence has preceded policy inflection points – or, at the very least, periods of heightened volatility in rate expectations.
The risk is that central banks, operating on lagging data, continue tightening into a disinflationary environment. Markets, by contrast, tend to anticipate these shifts earlier.
What to watch for positioning
From a positioning standpoint, three signals are critical:
1. Policy Expectations
Whether elevated sentiment linked to RBA rate hikes continues to push expectations higher, or begins to plateau — indicating the tightening cycle may be nearing its peak.
2. Inflation Narrative
Whether declining inflation sentiment persists, signalling growing confidence that price pressures have peaked.
3. Policy Risk
Whether divergence between ongoing RBA rate hikes and softening inflation sentiment begins to raise over-tightening concerns.
Read-through: Why this matters for institutional positioning
Taken together, our sentiment indicators point to an economy at a hawkish inflection point. Australia’s monetary cycle is tightening through RBA rate hikes, but the inflation narrative is already cooling. That divergence is the key signal.
If sustained, it increases the likelihood that markets begin pricing over-tightening risk – often before central bank communication reflects that shift. This creates asymmetric opportunities across rates, FX, and commodities linked to Australian demand.
This is precisely the type of signal our sentiment models are designed to surface early – providing institutional investors with a forward-looking edge – in macro research and positioning.
See how this fits into your workflow
Discover how our real-time sentiment intelligence can integrate directly into your macro and trading workflow – helping you identify narrative shifts earlier and act with greater conviction.
For institutional clients, simply email enquiries@permutable.ai to request a personalised demo.