Our economic outlook for Australia

Higher oil prices stemming from the Middle East conflict are a negative supply shock across most regions, lifting headline inflation while constraining global growth. For Australia, the impact is more nuanced because its status as a large net energy exporter should mean that higher commodity prices boost its national income through trade. Still, Australia’s economic challenge remains predominantly supply‑driven, with limited petroleum reserves and tighter financial conditions.

While Q4 2025 GDP was an upside surprise based on modest supply improvements, productivity growth remains weak, causing capacity constraints to bind even at moderate rates of expansion. On balance, we have downgraded our 2026 GDP growth forecast by 20 basis points (bps) to 2%. (A basis point is one-hundredth of 1 percent.)

Headline inflation reached 3.8% year-over-year in January. On March 17, the Reserve Bank of Australia (RBA) raised its cash rate target by 25 bps to 4.1%, based on its judgment of a material risk that inflation will remain above its target range of 2%–3%.

We expect the RBA to place greater weight on its price‑stability mandate, further pushing policy into restrictive territory to curb aggregate demand and keep inflation expectations anchored. We also anticipate that the RBA will maintain a “higher‑for‑longer” policy stance. We have revised our assessment of the year-end policy rate to 4.35%, suggesting one further RBA rate hike this year.