Deloitte Access Economics Business Outlook

23 January 2026: Australia’s nascent economic recovery risks being derailed by tighter monetary policy, according to a new Deloitte Access Economics report, which suggests the next move to the cash rate will be down, not up.

Releasing the December 2025 edition of the quarterly Business Outlook report, Deloitte Access Economics Partner and report author Stephen Smith said: “For most of 2025, Australian economic conditions were tracking as expected, with inflation trending lower, interest rates falling and household finances slowly strengthening.

“Most importantly, economic growth gradually began to grind higher, shrugging off the shackles of the ‘pandemic hangover’ that was 2024. But the September quarter inflation print was not in the script.

“After making steady progress towards the mid-point of the 2-3% target band, core inflation – calculated using the RBA’s preferred ‘trimmed mean’ measure – reversed course in the September quarter, rising by 3.0% over the previous 12 months.

“A further elevated reading for October – which also happened to be the first monthly inflation number reported by the Australian Bureau of Statistics (ABS) – means annual core inflation will sit above 3% at least until the middle of 2026.”

“As a result, the RBA will remain on high alert for the next several months, and an increase in interest rates at the first meeting of the Monetary Policy Board in early February looks to be a line ball call.

“In Deloitte Access Economics’ view, an increase in the cash rate in February would be premature for several reasons.

“Most importantly, confidently concluding that the economy has hit its speed limit – the current fashion among some forecasters to justify a rate hike – implies that measuring the economy’s potential rate of growth is an exact science. Far from it.

“These estimates come with wide margins of error and should be treated with caution. In a similar way, estimates of what represents a ‘neutral’ policy rate are also imprecise and highly uncertain. As recently as October last year, the RBA suggested that the nominal neutral interest rate might be in the order of 3.0%, marking the 3.6% cash rate as firmly in restrictive territory.

“Add in recent changes to the way trimmed mean inflation is calculated, the complex effect of electricity rebates and the messiness of the post-pandemic economic recovery, and the causes of the recent lift in inflation become even less clear.

“Combined, these factors suggest any policy response should be careful and cautious, rather than impulsive. Unfortunately, ‘impulsive’ is an apt description of the behaviour of financial markets in response to the recent inflation data. Market pricing for rate cuts – for February and beyond – has whip-sawed.

“Deloitte Access Economics remains of the view that a dispassionate and considered RBA will stay on hold in February, though the December inflation data – which will be released after this document goes to press – will be an important piece of the puzzle.

“That then sets the scene for what is likely to be a closely fought tug of war between inflation and economic growth over much of the remainder of the 2026 calendar year. In Deloitte Access Economics’ view, the recent re-acceleration in inflation is more likely to be caused by temporary rather than structural factors.

“Hence, while inflation will be slightly above the target band through the first half of 2026, it may ultimately dissipate without increases in rates being required."

Deloitte Access Economics expects the Australian economy to grow by 2.1% in the 2026 calendar year, underpinned by household spending and still-solid government demand, before accelerating to 2.3% in 2027 as easing construction-sector capacity constraints allow for a much-needed lift in dwelling investment.

Beyond that, the pace of expansion will depend on the volume of investment and the rate of productivity growth, which is now firming but remains below historical averages. On balance, annual growth is forecast to settle slightly above 2% over the long term. This is below the rates Australia has been accustomed to in the past.

Deloitte Access Economics’ forecasts see an extended hold giving way to a 25 basis point cut to the cash rate in August 2026, needed to support the nascent recovery in the pace of economic growth.

Is reform on the way?

Stephen Smith continued: “What is clear is the need to improve the supply capacity of the Australian economy. The supply side is the key to lifting productivity and sustainably raising the pace of economic growth.

“This task is urgent. Sagging productivity growth is groaning under the weight of unmet reform proposals, including on the tax system, regulation, federal-state financial relations, energy policy, skills, housing and technology.

“That the list is so long is a reflection of the unwillingness of politicians to make difficult decisions which will inevitably create both winners and losers. That is, over the past quarter of a century there has not been a shortage of reform ideas, but there has been a significant shortage of political will.
“If there was ever an opportune window for reform, it is 2026. After a thumping win last May, the Federal Government now has a significant majority in the lower house, while there is still more than two years before the next federal election is required to be held.

“The natural opportunity to unveil major reform intent is the Federal Budget, due to be handed down on 12 May. The Government will no doubt be weighing its political capital and questioning whether it can afford to make substantive policy decisions.

“For the sake of the economy, it can’t afford not to.”

Key forecasts: Deloitte Access Economics Business Outlook, December Quarter 2025

Business Outlook is a quarterly publication presenting detailed economic forecasts and commentary to help understand the economic forces shaping the business environment. The forecasts cover a detailed assessment of the national economy, world growth prospects, each of Australia’s states and territories, and industries.