Our economic outlook for Australia
February 12, 2026
A rate hike after a short easing cycle
“With the economy operating near full capacity and inflation proving persistent, the Reserve Bank of Australia is expected to lean more heavily into its price‑stability objective, maintaining a ‘higher‑for‑longer’ stance.”
Grant Feng,
Vanguard Senior Economist
Australia’s economic challenge remains heavily supply driven. Weak productivity growth has lowered the economy’s potential growth rate. The unemployment rate, at 4.1%, sits below the Reserve Bank of Australia (RBA) full-employment estimate, and capacity utilization is well above its long‑run average. As a result, even a moderate recovery in private demand and GDP could stall the disinflationary momentum observed last year.
We expect trimmed mean inflation to remain above the RBA’s 2%–3% target band in coming quarters, though gradual moderation is likely as tighter policy works through the economy.
Given this backdrop, we expect the RBA to lean more heavily into its price‑stability objective, maintaining a “higher‑for‑longer” stance. The RBA raised the policy rate to 3.85% on February 3, and we foresee the rate ending the year at that level. Policy from here will be increasingly data dependent. Any further adjustments will hinge on whether underlying inflation is credibly moving back toward target or instead exhibiting signs of renewed persistence.
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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