How strong is economic growth?<\/p>\n
Economic growth is forecast to reach 2.4% in early 2026, a rate\u00a0that\u2019s\u00a0slightly above the pace the economy can comfortably sustain,\u00a0sometimes called its \u201cspeed limit.\u201d<\/p>\n
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<\/a> is also adding momentum\u00a0as are improvement in housing investment and support from public demand.<\/p>\n What could this mean for borrowers?<\/p>\n 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.<\/p>\n However, if household spending or business investment turns out even stronger than expected, the RBA may need to raise rates more than once.\u00a0In contrast, coolness in the labour market or a faster fall in inflation could deter the RBA.<\/p>\n The bottom line<\/p>\n 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.<\/p>\n \u201cWe 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,\u201d said Allen.<\/p>\n