Bank Economists Predict Sharper Economic Slowdown for Australia
Australia faces a sharper and longer economic slowdown as surging global oil prices and persistent domestic inflation force the Reserve Bank of Australia to lift the cash rate to an 18-year high of 4.85 percent, according to major bank economists.
Reserve Bank May Raise Cash Rate to 4.85 Percent
Financial markets and economists widely expect the Reserve Bank to deliver a fifth interest rate hike on Tuesday, pushing the official cash rate to 4.85 percent—its highest level since 2008. According to Belinda Allen, head of Australian economics at the Commonwealth Bank of Australia, this aggressive central bank posture combined with an extended Middle East conflict and collapsing house prices will drive real gross domestic product (GDP) down to just 1 percent by the middle of next year. That figure marks a sharp downgrade from a previous estimate of 1.8 percent.
Growth through 2027 is projected to remain subdued at an estimated 1.1 percent, matching forecasts issued by the National Australia Bank (NAB). Gareth Spence, NAB’s head of Australian economics, noted that economic growth will remain below trend over 2027 and 2028. CBA had previously anticipated signs of economic recovery by the New Year, but Allen stated that the economy is now bottoming deeper and later than expected.
The primary driver behind this pessimistic revision is the trajectory of global energy costs. Brent crude surged from approximately $72 a barrel in early July to above $110, driven by an expanding conflict in the Middle East and fading prospects for an immediate peace deal. Compounding the pressure, the Australian Bureau of Statistics released data showing annual headline consumer price inflation accelerating to 4.3 percent in September, while underlying inflation hovered at 3.7 percent—firmly above the central bank’s 2 to 3 percent target band.
Unemployment May Rise to Curb Inflation
To bring inflation under control, central bank officials indicate that unemployment must rise above previous expectations. Spence forecast that the key jobless measure will climb from its current 4.7 percent to as high as 5.4 percent by the end of next year. CBA models project a slightly lower unemployment peak of 5.1 percent over the same timeframe. Both projections signal that the Reserve Bank’s multi-year strategy of curbing inflation without sacrificing post-COVID employment gains is increasingly out of reach.
As union leaders protested against the anticipated rate hike outside the Reserve Bank’s Sydney offices on Monday morning, Spence warned that the risk remains that the central bank might be forced to tighten further. Highlighting the severe localized fallout of these monetary policies, NSW Premier Chris Minns warned that another rate increase would trigger permanent job losses and business closures across the state. In federal politics, the deteriorating economic outlook increases pressure on Treasurer Jim Chalmers ahead of the December mid-year budget update.
The risk of an outright economic contraction remains a central concern for financial analysts.
Home Prices Fall as Household Spending Slows
Australia’s property slump is tracking to become one of the deepest on record. Oliver reported that home prices could fall by as much as 15 percent before levelling off late next year, with Sydney property values already down by 10 percent from their recent peak.
Households are expected to absorb the vast majority of the economic slowdown. CommBank data indicates that annual spending growth will decelerate from 1.8 percent in the June quarter of 2026 to just 0.7 percent by mid-2027. Weaker income growth, higher borrowing costs, and elevated energy bills are directly squeezing household budgets. Australians are making deliberate choices to restrict spending, dedicating more of their income to fuel and essentials while cutting back across other categories.
Housing indicators reflect this broader consumer pullback, with CommBank’s daily data showing home prices across the five capital cities down 8 percent from their peak. While consumer spending and homebuilding face severe headwinds, business investment continues to provide some economic cushioning, supported by ongoing capital deployment in renewable energy projects and a growing pipeline of data centre construction.