Our economic outlook for Australia
May 12, 2026
RBA tightens as inflation risks intensify
“With energy prices set to push inflation higher, the Reserve Bank of Australia is signaling a clear intent to push policy into restrictive territory to curb demand and re‑anchor inflation expectations.”
Grant Feng,
Vanguard Senior Economist
The Middle East conflict has lifted oil prices and intensified supply‑side cost pressures, and that’s feeding into consumer prices. But the impact on economic growth is more nuanced. Because Australia is a large net energy exporter, higher commodity prices should boost national income through stronger terms of trade, partially cushioning any growth drag. On balance, and considering Australia’s heavy oil dependence, limited petroleum reserves, and tighter financial conditions, we have downgraded our 2026 GDP growth forecast by 20 basis points to 1.8%. (A basis point is one-hundredth of a percentage point.)
Australia’s economic challenge remains predominantly supply‑driven. The economy has been running beyond its sustainable capacity, with the unemployment rate below estimates of full employment. This raises the risk that elevated inflation becomes embedded in expectations, which is arguably a more pressing concern than it would be in other major economies.
With energy prices rising further to date in the second quarter, near‑term inflation risks clearly skew to the upside. Three consecutive interest rate hikes (in February, March, and May) suggest a shift by the Reserve Bank of Australia (RBA) from a follower to a first mover. Although indicators of economic sentiment have deteriorated, the RBA appears increasingly focused on its price‑stability mandate. The priority is clear: Prevent inflation from becoming entrenched and avoid a repeat of the 2022 policy misstep, when inflation materially overshot the RBA’s target.
Whether the RBA tightens further will hinge on how quickly the economy weakens. The combination of higher rates and rising fuel costs has already triggered a sharp deterioration in sentiment, suggesting a downturn may be underway. Our base case is that the RBA pauses to year-end, contingent on clearer evidence of slowing demand and labor market softening. However, if the economy proves more resilient than expected, the risk of an additional hike remains firmly on the table.
Australia economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2026. Trimmed mean inflation is the year-over-year change in the Consumer Price Index, excluding items at the extremes, as of the fourth-quarter 2026 reading. Monetary policy is the Reserve Bank of Australia’s year-end cash rate target.
Source: Vanguard.
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