How strong is economic growth?
Economic growth is forecast to reach 2.4% in early 2026, a rate that’s slightly above the pace the economy can comfortably sustain, sometimes called its “speed limit.”
Households are a major driver of this strength, helped by earlier interest rate cuts, recent tax changes and steady job and income gains. Investment in data centres and renewable energy projects is also adding momentum as are improvement in housing investment and support from public demand.
What could this mean for borrowers?
The expected February rate rise would be a fine-tuning move, not the start of a large run-up in interest rates. The RBA is aiming to nudge inflation back toward target rather than cool the economy sharply.
However, if household spending or business investment turns out even stronger than expected, the RBA may need to raise rates more than once. In contrast, coolness in the labour market or a faster fall in inflation could deter the RBA.
The bottom line
Australia enters 2026 in solid shape, but its strength is keeping inflation higher than the RBA would like. A modest rate rise in February looks likely as the central bank works to keep price pressures in check while supporting a steady, sustainable pace of growth.
“We expect inflation to gradually return toward the midpoint of the target band by late 2027. A small rate rise next year would help set the foundation for a steady, sustainable period of growth,” said Allen.
Read Belinda Allen and the Australian Economic team’s full analysis: The Australian economy in 2026 – prepare for higher interest rates