Australia

After the RBA hiked its policy rate by +425bps in 2022-2023, inflation subsided to 3.2% in 2024 and 2.8% in 2025. Following a pause in 2024, the central bank began an easing cycle in 2025, implementing three consecutive 25bps rate cuts, which brought the policy rate down to 3.60%. However, the resurgence of inflation forced the RBA to hike four times in 2026, bringing the policy rate to 4.60%. We expect the RBA to maintain a tightening bias in the near term, before beginning to ease in mid-2027 as inflation subsides, bringing the policy rate down to 4.10% by end-2027 and 3.60% by end-2028. Inflation is forecast to reach 3.7% in 2026 before returning to the RBA's target range at 2.8% in 2027 and 2.5% in 2028, supported by the expected normalization of energy prices.

After a significant worsening during the pandemic, the fiscal deficit recovered to -1.3% in 2023 following increased tax revenues and high commodity prices, among other factors. However, falling global commodity prices, an aging population, climate change and lower tax revenues widened the fiscal deficit again to -2.8% in 2025. The fiscal deficit will remain elevated in 2026 at around -2.4% before slowly improving to -2% by 2028.  Looking ahead, Australia is likely to maintain moderate fiscal deficits, given rising defense costs, healthcare and welfare spending.

Australia's short-term financing risk is considered low, though some monitoring is required regarding domestic debt. Notably, private sector credit needs close monitoring as the RBA's rapid tightening cycle in 2026 has significantly increased debt-servicing costs for households. Australia's household debt remains among the highest in OECD countries, at around 115% of GDP, while the predominantly variable-rate mortgage structure means that the hikes will be passed onto borrowers.  

Looking at potential external fragilities, while Australia has historically run deficits, the current account balance was in surplus between 2019 and 2022, supported in part by high commodity export prices. However, as global prices for commodities declined and Chinese demand for those goods softened, Australia's current account has been back in deficit since 2023. After an estimated -2.6% in 2025, we expect the deficit to remain elevated at -2.3% in 2026. In the medium term, Australia's reliance on China for commodity exports, combined with current global geopolitical tensions, could pose increasing headwinds. 

Australia's business environment is well-positioned in our assessment of 185 economies. The World Bank's annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business-friendly and the level of corruption is low. The Heritage Foundation's 2026 Index of Economic Freedom ranks Australia 4th globally (up from 6th in 2025), and 1st in the Asia-Pacific region, reflecting very strong scores across the board. However, Australia scores less favorably regarding the tax burden and government spending. In our proprietary Environment Sustainability Index 2025, Australia ranks 51st out of 210 economies, down from 42nd in 2024. Underperformance is mainly visible in renewable electricity output, recycling rate and CO2 emissions per GDP. 

The Labor party, led by prime minister Anthony Albanese, won a landslide re-election in May 2025 and now holds a comfortable majority in the House of Representatives. The government's second term has been defined by an housing-affordability agenda combined with continued infrastructure spending and a ramp-up in defense outlays. The government has also passed campaign-finance reform legislation introducing donation and expenditure caps, though legal challenges at the state level have raised questions about the durability of similar provisions at the federal level. Externally, the government continues to diversify its partnerships beyond the US and China, notably with India and Japan. The next election is due by September 2028.