RBA rate hikes have slowed the Australian economy, with the housing market weakening sharply as deteriorating affordability weighs on demand
Higher interest rates will also weigh on household spending, but consumption remains supported by household savings, tax cuts, a resilient labour market and ongoing population growth
Higher capital expenditure on data centres and renewable energy is supporting business investment while activity remains weak elsewhere
The retreat in energy prices following the signing of the MoU should limit damage from the Iran conflict
Growth is forecast to slow from 2.0% in 2025 to 1.7% in 2026 and 2027, before recovering toward trend in 2028
Inflation
Inflation remains elevated reflecting strong demand over 2025, weak productivity growth and the pass-through of higher energy costs
Headline inflation peaked at 4.6% in March before easing to 4.0% in May as the fuel excise cut temporarily lowered fuel prices. By contrast, underlying inflation continued to rise, reaching 3.6% in May
Inflation is expected to remain above the RBA’s target range through 2026
As growth slows and energy-related pressures fade, inflation should gradually return toward target over 2027, but it is not until 2028 that we expect inflation to reach the midpoint of the target band
Monetary policy
The RBA quickly lifted the cash rate into restrictive territory in H1’2026 to contain rising inflationary pressures
Inflation persistence creates some risk of an additional RBA rate hike in the near term, but the downturn already evident in interest-sensitive sectors increases the risk of recession, making the RBA less likely to lift rates again
Instead, policy is expected to remain on hold for an extended period, with rate cuts unlikely until H2’2027
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