By Ashwin Clarke, Senior Economist at CBA:
- We updated our economic outlook for 2026 this week. We expect GDP growth to pick up a little further over the next 6 months before settling down by end 2026. With growth above capacity, and a resilient consumer, we expect inflation to show signs of persistence and the RBA will hike the cash rate by 25bp once in 2026 in February.
- The federal government’s mid-year budget update projected a small decrease in the deficit for this year. While this is an improvement, it is still a large turnaround from a small deficit recorded in 2024/25 and the two surpluses prior to this.
- As the holiday season approaches, there is a break in the data flow. The one exception is the RBA minutes, which will be released on 23 December. Next year starts off with a bang, with the November Consumer Price Index on 7 Jan, which we expect will show monthly headline inflation at 0.3%/mth, with the annual rate easing to 3.6%.
Australia has ended 2025 in a cyclical upswing. On Tuesday, we released our updated economic outlook and expect GDP growth will finish the year at 2.3%/yr, up from just 1.3%/yr at the end of 2024.
While growth has improved, progress on inflation has stalled. Trimmed mean CPI is expected to finish 2025 at 3.3%/yr, the same rate that we saw at the end of 2024. We expect GDP growth to pick up a little further over the next 6 months, from 2.1%/yr in Q3 25 to peak at 2.4%/yr in Q1 26 before settling down to 2.2% by end 2026.
With growth above capacity and a resilient consumer, we expect inflation to show signs of persistence. As a result, we now expect the RBA will hike the cash rate by 25bp in February to ensure inflation is returned to the mid-point of the target band by the end of 2027. But we don’t expect a large hiking cycle, only fine tuning by the RBA and see the cash rate sitting at 3.85% at the end of 2026.
The risk sits with a larger hiking cycle if growth has more momentum and inflation more persistence than we predict.
On Wednesday, the federal government released its 2025/26 mid-year budget update. An underlying deficit of $36.8bn is expected compared to $42.1bn at the time of the March budget. However, it is still a large turnaround from a small deficit of $10bn recorded in 2024/25 and the two surpluses prior to this. The lift in the budget deficit should not impact the monetary policy outlook more broadly.
The improvement this financial year has come through a better nominal economy and some restraint on the fiscal side. Rising expenses and limited sources of revenue growth will continue to haunt budget positions. The deficits for the outyears have barely budged, with underlying deficits of just over 1% of GDP forecast till 2028/29 on current projections.
On Thursday, the ABS published its Finance and Wealth data. This data showed household wealth grew a strong 3.1% in nominal terms in the September quarter and 8.8% over the year. When adjusted for inflation, this results in a 2.2%/qtr increase and 5.6%/yr.
This annual number is around its decade average and supports the solid foundation that households have to continue to drive economic growth from here.
On Friday, we learnt monthly credit growth ticked down slightly from 0.7% in October to 0.6% in November. The annual rate though remains strong at 7.4%, the same as October. Monthly housing credit growth remained at 0.6%, but the annual rate ticked up to 6.6%, underpinned by investor credit, which grew 8.1%/yr.
Strong credit growth is another piece of evidence that suggests the pick-up in economic conditions continued over November.
Looking ahead, the RBA minutes will be released on the Tues 23 Dec. Data flow in 2026 will start with a bang with the November monthly CPI and building approvals released on Wed 7 Jan.
Higher electricity and fuel prices are expected to be the main drivers of headline inflation in November. Market services inflation is expected to ease to ~0.25%/mth in November (from 0.5% in October), though the annual rate remains above the RBA’s target band at 3.1%.
These outcomes for November are consistent with our forecasts for trimmed mean inflation to be 0.9%/qtr in Q4 25. On balance, we see risks tilted towards a stronger outcome in November.
