Australia may weigh early rate hike as economy nears speed limit

The RBA is facing a more complex outlook than peers as its economy is entering an upswing with elevated capacity utilisation

Australia’s central bank may need to raise interest rates as early as the first half of 2026 if economic growth quickens and the labour market tightens, according to Sally Auld, chief economist at National Australia Bank.

Her assessment highlights the unusual challenge confronting the Reserve Bank of Australia (RBA) after it delivered a soft landing for the economy rather than pushing it into recession to slow inflation. Australia is already at full employment and economic growth is on track to return to trend next year, Auld said in a research note on Thursday (Nov 27).

“With so little spare capacity, the economy cannot sustain above trend growth without putting upward pressure on prices and wages,” said Auld, who reckons trend growth is around 2.25 per cent.

The RBA, which cut rates three times this year as inflation returned to target, is facing a more complex outlook than peers as its economy is entering an upswing with elevated capacity utilisation. That leaves little headroom for rapid economic growth and hiring without fuelling inflation.

“There is no short-term solution to the challenges presented by the soft landing,” according to Auld. “In the long run, better productivity outcomes or higher labour supply growth can ease the constraint.”

Australia’s productivity growth has been tepid and the RBA has been forced to scale back estimated potential growth to reflect that weakness. Auld says this reinforces her view that Australia’s policy easing cycle is over.

“Any acceleration in growth and/or a tightening of the labour market from here will likely force the RBA to contemplate the need for rate hikes, possibly as soon as 1H26,” she said.

That view is shared by a handful of economists including Commonwealth Bank of Australia, UBS and Barrenjoey Markets which have all pointed to a rekindling of price pressures in the economy. BLOOMBERG

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