Albanese said the government is focused on creating stability and security for the nation but said this will not happen "standing still while the world changes around us".

"It means anticipating and creating change, true to Australian values and in Australia's interests. Because if people feel like the economy is not working for them, if they're putting in the effort but not seeing the reward, if planning for the future feels like a luxury, then government cannot provide stability, just by keeping things as they are," he said.

"There is no security in maintaining a status quo that doesn't work for people. Economic reform that drives growth, boosts productivity, tackles inflation and lifts living standards is always necessary.

"And in times of uncertainty such as this, it is urgent. We all know the mindset that left Australia exposed to this global shock."

Albanese laid blame on pervious governments for cutting TAFE training, pressuring manufacturing and industry to go offshore, and putting multinational firms ahead of Australian gas users.

Albanese accused former governments of thinking "Australia could get away with this, because there would always be someone else, somewhere else, who would sell us what we needed cheaper than we could make it ourselves."

He said this put Australia in a position of vulnerability and "will not take us out of it."

"We were investing in Australia's economic resilience well before this crisis began. And for our government, international uncertainty is not an excuse to delay or hold back reform - it is the reason we must press ahead," Albanese said.

"Because we will not generate the same prosperity or create the same opportunities, if we continue to rely on an economic model designed in a different time and built for a more predictable world. Nor can we go back to those days.

"And any party or leader who promises otherwise, anyone who pretends that the solution to housing or jobs or wages or health is to somehow to recreate the 1950s or 60s, or whatever time they imagine everything was hunky dory, is simply not being fair dinkum."

Albanese said Australia will not be able to "find our future security in the past", or by copying the approaches other nations.

"We have to invest in it, build it and create it for ourselves. We can, we must - and we will," he said.

"And even as we plan and build for this stronger, more resilient future, our number one priority remains helping people with the cost of living. That is the balance we will strike in next month's Budget. It is our government's most important Budget to date - and it will be our most ambitious. It has to be."

Albanese stressed that the scale of the challenge facing the nation is not lost on the government, but that the breadth of opportunities ahead "demands ambition and urgency".

"And our Australian character demands that ambition too. That's what I mean when I talk about progressive patriotism. Uniting to celebrate what we have - and working together to make it better," he said.

"Recognising that because we live in the best country in the world, we have a responsibility to build for the best. And to empower every Australian with the opportunity to be their best. As a matter of national pride - and in order to realise our national potential.

"These Australian values are the right ones to guide us through this crisis - and to shape what comes next."

Albanese said the government will assist businesses being squeezed by the conflict with interest-free loans, through the $1 billion Economic Resilience Program. He said this should help truck drivers, freight companies and fuel and fertiliser producers continue their critical work.

This program will be a sub-fund under the government's $15 billion National Reconstruction Fund (NRFC). The NRFC will partner with banks to begin rolling out the loans in the next fortnight.

"These firms are not just being affected by this crisis, they are essential to Australia getting through this crisis," Albanese said.

"So, our government will extend their credit to help them, and the farmers and producers who rely on these supply chains, to weather the storm. This is just another way we are acting to get ahead of issues.

"No government can promise to eliminate the pressures this crisis will impose. But we can be a buffer against the worst of it. A shock absorber, in a time of global shocks. We will do everything we can to protect the Australian people from what the world throws at us."

The main reason for the rise was driven by increased property values the value of residential land and dwellings rising 3.2%, equivalent to $368.6 billion.

This contributed two percentage points to the growth in household wealth, while superannuation assets contributed 0.3 percentage points.

"Rising house prices continue to be the main driver of growth in household wealth in the December quarter," ABS head of finance statistics Mish Tan said.

"The mean price of residential dwellings was up 2.7% in the December quarter 2025, with strong growth seen in Western Australia, Queensland and South Australia."

Household borrowing grew 2%, or $64.2 billion, reducing the overall growth in household wealth by 0.3 percentage points.

Total demand for credit was $142.4 billion in the December quarter.

This was driven by households ($63.3bn), private non-financial businesses ($48.3bn) and general government ($24.3bn).

Household demand for credit was higher than September 2025, which came in at $31.4 billion, driven by growth in housing loan balances.

"The December quarter had the strongest growth in housing loan balances since December 2021, with strength across all borrower types," Tan said.

"Recent policy changes for first home buyers were reflected in the strength of new loan commitments which are flowing through to the increase in housing loan balances."

In the December quarter, an expansion of the Australian government's 5% Deposit Scheme was introduced as well as the  Help to Buy Scheme.

Despite the rise in household wealth, Commonwealth Bank head of Australian economics Belinda Allen said the bank's outlook for the economy is still being downgraded.

"In response to the conflict in the Middle East, we have revised our outlook for inflation higher, downgraded our outlook for economic growth and increased our forecast for unemployment," Allen said.

"Prior to the war, the economy was clearly operating above its supply capacity, and the RBA had signalled it wanted to see demand slow, to bring above-target inflation down.

"With interest rates rising, we were already expecting growth to ease modestly in 2026. The current energy and supply shock further complicates the picture - it will drive up inflation further and hurt growth, particularly consumer demand. The combination of these forces makes the outlook for both monetary and fiscal policy more nuanced."

"The 3.7% annual CPI inflation to February eased slightly from the 3.8% annual CPI inflation to January," ABS head of prices statistics Sue-Ellen Luke said.

Annual trimmed mean inflation was 3.3% in February, just below the market expectation of 3.4%.

Additionally, annual trimmed mean inflation in January was revised down from 3.4% to 3.3%, meaning inflation has now held at 3.3% for the past three months.

While that may seem like positive news, Betashares chief economist David Bassanese said the data does not necessarily mean inflation is easing.

"As the RBA has long argued, the monthly CPI reports can be volatile, with still not well-known seasonal variability," Bassanese said.

"[The] 'soft' February report follows on from a seemingly 'hot' January report. [The] report also pre-dates the recent surge in petrol prices owing to the war in Iran."

Bassanese said this is why the Reserve Bank of Australia (RBA) will not be waiting on the all important quarterly CPI data, due to be released in April.

"All up, we'll get a better picture of recent inflation trends when the all-important March quarter CPI report is released in late April. That report will also include the recent surge in petrol prices," he said.

"Of course, depending on how US-Iran 'peace talks' progress in the coming days, petrol prices could soon ease once again, though this won't be early enough to be reflected in the March quarter inflation results.

"As it stands, therefore, it's still likely that the March quarter inflation report will be uncomfortably high, leaving the Reserve Bank under pressure to raise rates again in May. News of a possible peace deal in Iran can't come quickly enough."

Likewise, Bendigo Bank chief economist David Robertson said the data proves inflation is still uncomfortably high, but a May interest rate hike may not yet be a given.

"This marginal easing sets a slightly lower baseline ahead of the impending impact of the oil shock driven by the Middle East conflict, suggesting the next RBA hike may not be until August," Robertson said.

"The front loading of the two hikes this year, after the 5-4 vote for the March hike, has prioritised inflation ahead of jobs in the RBA dual-mandate, so leaves the next decision at the mercy of more information on labour markets, as well as any signs of de-escalation in the Middle East.

"The bulk of the price pressures leading into the oil crisis continue to come from housing inflation (now up 7.2% y/y), but the focus in the next CPI reports will no doubt be on fuel prices."

Treasurer Jim Chalmers - who is preparing to hand down the Federal Budget in May - said he is focused on keeping petrol prices as the conflict in the Middle East continues.

"While we've seen inflation tick down today, it was too high before the war and the conflict in the Middle East will make it worse," he said.

"We recognise people are still under pressure, which is why we're rolling out responsible cost of living relief and taking action to shore up fuel supply and ensure Australians are getting a fair go at the bowser."

Chalmers said Australia is not immune from global uncertainty or volatility, but the economy is well placed to deal with global shocks.

"We're well placed and well prepared with faster growth than any major advanced economy, low unemployment and solid wages growth," Chalmers said.

"The Albanese government's three main economic priorities are addressing inflation, productivity and resilience, and global uncertainty and [the inflation] figures show why that's the right approach."

The agreement will see the EU to eliminate duties on approximately 98% of Australia's exports entering the EU, while emphasising support on investments in both directions, and allow small and medium-sized enterprises (SMEs) in Australia to have better access to European government contracts, worth around $845 billion annually.

"Australian service providers will have greater market access to the European Union, including in financial services, education, tourism and communications. Australian professionals will be able to travel to the European Union more easily and will benefit from streamlined recognition of their Australian qualifications," Prime Minister Anothony Albanese explained.

"I am proud that we have been able to secure this deal, which will deliver benefits for both Australia and the European Union for generations to come.

"This deal creates major new opportunities for Australian exporters in the European Union's massive $30 trillion economy, and will reduce costs for Australian consumers."

Although the negotiations have concluded, the free trade agreement has not yet come into force.

The Super Members Council (SMC) is urging the government to swiftly ratify the agreement to expedite implementations.

The SMC said peak bodies will work with governments and partners on both sides to ensure the agreements translate into practical outcomes for businesses, workers and communities.

The SMC believes the agreement will remove barriers to support investment, innovation and job creation across Australia, including regional communities where many resources, critical minerals and clean energy sectors are based.

However, the agreement will also fast-track Australia's participation in Horizon Europe - a seven-year initiative for sustainable development - and enhance our defence industry capabilities.

Commenting, SMC chief executive Misha Schubert explained how super funds can tap into these investment opportunities.

"For millions of everyday Australians with super, a comprehensive free trade agreement with the EU can help open the door to further investment opportunities that will be hugely important to their retirement incomes," Schubert said.

"The EU already attracts billions of dollars of super investment, and that's set to continue as Australians' super funds continue to scour to the globe for the best places to deploy hundreds of billions of dollars more in coming years, offering further opportunities to deliver good long-term, risk adjusted returns for their members."

Meanwhile, BMI, part of Fitch Solutions, released an outlook for the Australia-EU free trade agreement, stating both economies will observe complementary benefits over time despite an earlier positive capture by the EU.

"Over time, clearer labelling rules and phase-outs/grandfathering arrangements will reduce consumer confusion and help EU producers better differentiate authentic products on Australian shelves," the report said.

"In parallel, EU manufacturers and service providers, ranging from industrial and engineering names, like Siemens and ABB, to automotive groups, such as Volkswagen Group and Mercedes-Benz, stand to benefit from improved procurement access and services/investment disciplines that can translate into incremental but durable market share gains in a high-income, standards-driven import market."

For Australia, the agreement's core value is more concentrated towards improved entry conditions into Europe, but benefits will likely accrue gradually, the report said. This is due to the EU's most commercially openings for Australia are typically in regulated and politically sensitive areas, especially agri-food.

In response, Iranian President Masoud Pezeshkian said the US threats were "delirious".

"The illusion of erasing Iran from the map shows desperation against the will of a history-making nation," he said in a post on X.

"Threats and terror only strengthen our unity. The Strait of Hormuz is open to all except those who violate our soil. We firmly confront delirious threats on the battlefield."

Betashares chief economist David Bassanese said there is now a very real risk of a major surge in risk-off sentiment, adding that hopes for a Trump TACO moment - meaning 'Trump always chickens out' - seemingly fade.

"It's a Middle East form of MAD - mutually assured destruction. Attacks on energy infrastructure and/or further signs the US is considering 'boots on the ground' could see oil prices soar, which would hurt both equity and bond markets," Bassanese said.

"As we saw in 2022, if a global energy shock plays out, there may be a further rotation from interest rate-sensitive cyclical and technology sectors into more value-orientated defensives and resources."

Bassanese said Australian markets are suffering, with the ASX 200 falling another 1.5% this morning, closing in on a 10% correction.

"Given the seriousness of the events in the Middle East, it's perhaps surprising equity markets have not fallen harder in recent weeks - likely because investors have been hoping Trump would end hostilities at any given moment. So far that's not been the case, and sadly we may need to see more market pain before a Trump TACO moment might arrive," he said.

As the back and forth continues, global oil prices continue to take centre stage with Treasurer Jim Chalmers convening a special meeting of the Council of Financial Regulators to discuss the conflict in the Middle East, its potential implications for the Australians economy and financial markets, and actions being taken to shore up resilience.

"Australia has a strong and resilient financial system that is well placed to confront global instability, and that was the clear message from regulators [on Friday]," Chalmers said.

"While Australia is not immune to global challenges, we have strong economic fundamentals and our banking system is well-capitalised."

Chalmers added that the government and financial regulators "remain vigilant" to emerging risks and are working together to prepare for all scenarios.

"The recent conflict in the Middle East has compounded uncertainty in the global economy and is having an impact at home, including on fuel prices," he said.

"We've appointed a Fuel Supply Taskforce Coordinator to work with the states and territories to get fuel to where it's needed, released up to 762 million litres of petrol and diesel from domestic reserves and temporarily relaxed fuel standards to get more petrol to service stations.

"We're increasing surveillance, doubling penalties for misconduct and empowering the consumer watchdog to get to the bottom of what's going in the fuel sector."

Chalmers said there is more the government is working on and he has also engaged with New Zealand's financial minister Nicola Willis on responses to the conflict.

"We'll continue to work closely with regulators to ensure we're doing everything we can to maintain fuel security, economic stability, address price pressures and make our supply chains more resilient," he said.

In its latest Financial Stability Review report, the RBA highlighted high-profile defaults of automotive parts supplier First Brands Group and subprime auto lender and dealer Tricolor last year underscored "opaque linkages and common exposures between non-bank credit providers and the broader financial system."

Banks reported more than US$1 billion writedowns from their direct lending to these firms, as well as their exposures through credit funds and warehouse lending facilities.

Another example is UK-based mortgage lender Market Financial Solutions, which some global banks and private credit providers reported material exposures to.

In the US, the RBA pointed to some private credit funds experiencing an increase in redemption requests.

BlackRock's private credit fund HPS Corporate Lending Fund (HLEND) is one example, activating its 5% limit after investors sought to take out US$1.2 billion.

Blackstone, Morgan Stanley and Cliffwater have also experienced a surge in redemption requests and capped withdrawals.

"Concerns have also grown among investors around private credit and private equity exposures to the software industry, where valuations have come under pressure in the face of potential disruption from AI-based competition," the RBA said.

In Australia, since the escalation of the Middle East conflict, the RBA observed funding conditions tighten and financial market volatility pick up.

"Despite the strong growth in their lending, non-bank lenders still only account for 6% of financial system assets, limiting their systemic importance. Private credit has continued to grow strongly. Nevertheless, available estimates suggest private credit remains a small part of the overall financial system, accounting for less than 2% of assets in the financial system," the RBA said.

Furthermore, the conflict has impacted the energy and other commodity markets, resulting in spill over to other asset classes.

"The geopolitical environment remains highly fluid. The conflict in the Middle East could trigger a larger shock that destabilises the global economy, particularly if supply disruptions to oil and other commodity markets are prolonged," the RBA warned, foreseeing the potential for a "severe international shock."

Despite this, Australia's financial appears to have "a good degree of resilience, though the risk of a more material adverse shock has increased over recent weeks."

However, he said the government will work to mitigate the risks facing Australia in the May Federal Budget.

"While Treasury will retain its long-term productivity assumption in this Budget, it will make some near-term adjustments. Previously, it expected productivity to return to trend within two years," Chalmers said.

"Now it expects that convergence to take closer to five, in line with other key long-run assumptions."

Another issue Chalmers is hoping to address is evolving population dynamics, with Treasury anticipating higher-than-expected net overseas migration of around 300,000 people a year. Treasury said this should help boost the economy.

"Net overseas migration is 45% below its peak, but Treasury expects the fall to be more modest over the forecast period, mainly due to lower than expected departures," Chalmers said.

"Treasury's fertility assumption will also be revised down to reflect lower expected births, in line with international trends."

Chalmers said work trends are also evolving, with Treasury expecting participation to edge higher over the next couple of years, primarily led by women and older workers.

"Altogether, it means Treasury has changed its view of potential growth in the near term," he said.

"This change alone means GDP is now likely to be a quarter to half a percentage point weaker in the middle years of the forward estimates. A small change in a forecast, but it tells a bigger story. Not primarily a demand story, but a supply one."

Chalmers said Australia is facing inflation challenges in the near term, productivity in the medium term and ongoing global uncertainty.

"Treasury estimates that GDP would be 0.6% lower in 2027 and even by 2029 would still be below where it would have been without the conflict [in the Middle East]," Chalmers said.

"Around half of the impact to GDP is due to the impact of higher oil. The other half is due to broader consequences.

"Treasury, with other agencies, is continuing to undertake detailed modelling and scenario planning on industry and supply chain impacts."

Chalmers said as the conflict in the Middle East continues, Treasury estimates inflation could peak in the "high fours or even higher" this year.

"These effects add a further quarter of a percentage point to headline inflation and double the negative impact on GDP," Chalmers said.

"In the short-term case, output would be 0.2% lower around the middle of this year but this gap would quickly close because the shock is short lived.  But the more prolonged scenario would leave a bigger scar."

Chalmers said capacity constraints on the supply side are expected to weigh on the economy.

"It's why our Budget preparations are focused on three ambitious reform packages. A savings package. A productivity and investment package. And a tax package as well," Chalmers said.

"These packages are being designed to work together. If the main constraint we are collectively facing is capacity, these packages will help expand it."

Chalmers said more savings will make room for private sector growth while building fiscal buffers, and productivity enhancing reforms should help boost supply, generate higher living standards and unlock more investment.

Chalmers said the government's aim is to help the economy grow without adding to price pressures.

Chalmers added tax reforms will focus on driving more productive investment while supporting budget sustainability and equity.

"Together, they will form a comprehensive supply side strategy. To expand capacity and boost resilience, lift potential growth and deliver higher wages, without more pressure on prices," he said.

Chalmers said he is committed to budget repair having already found $114 billion of savings and reprioritisations across seven budgets and mid-year updates.

"The budget is now more than $233 billion better than when we came to office and debt is $176 billion lower this year compared to the 2022 PEFO," Chalmers said.

"This means that debt is forecast to peak much lower - around 37% of GDP compared to the almost 45% we inherited."

However, Chalmers said that while good progress has been made, more needs to be done over the medium-term horizon.

"We're overhauling our approvals regimes, strengthening and streamlining our foreign investment regime and opened our Investor Front Door," Chalmers said.

"We're reforming the payments system, abolishing tariffs, cutting red tape and streamlining the National Construction Code.

"We're seizing the opportunities from net zero and the digital economy and investing in our human capital - with Free TAFE, the universities accord and fairer schools funding."

The Treasurer said the government will have a sharper focus on unlocking "productive investment", better regulation, faster approvals and more open trade.

"It will be all about three things, attracting and absorbing investment; making it easier to build and build faster; and cutting compliance costs where we can."

On tax reform, the Treasurer said it is an important part of the government's productivity agenda with a focus on cutting income tax rates, lifting thresholds, returning bracket creep and incentivising participation.

"We are working on more tax reform in the Budget - how much we can do in May depends on fiscal considerations, international developments and Cabinet deliberations," he said.

Chalmers added that the current tax system is "outdated" and weighs on younger Australians. He said reform would have a substantial focus "on our intergenerational responsibilities".

Chalmers said if the government "can afford to", it will look at tax reforms that could incentivise productive business investment.

Lastly, addressing the ongoing conflict in the Middle East, Chalmers said it was a stark reminder of how quickly the global economic outlook can change.

"It is adding to inflation risks, weighing on growth, and increasing already elevated uncertainty," he said.

"But it is also a stark reminder of why addressing our three key economic challenges is so urgent.  All this economic uncertainty and volatility is a reason for more reform, not less. It's a reason to go further, not slower.

"We have deep capital markets, a world-leading super system, abundant natural advantages in energy and resources, and a public balance sheet in far better shape than most of our peers. But we are not complacent about the risks in a global economy that is perilous and unpredictable. We will make hard decisions in May.  Our task is not just to respond to shocks, but to position Australia to succeed through them."

The Select Committee on the Operation of the Capital Gains Tax Discount, established in November 2025, tabled its final report this week, publishing four key findings.

The committee said it received consistent feedback that the current design of the discount rules results in "a degree of concessional treatment relative to labour income which can distort decision making and incentivise tax planning."

The current discount provides for a 50% reduction to the tax payable on an asset held for 12 months or more. The government has been toying with the idea of reducing the discount for some time; it, along with removing negative gearing, was a commitment the Labor party took to the 2019 election.

Independent MP Allegra Spender released a whitepaper this month which called for the CGT discount to be reduced to 30%, estimating that it - coupled with other tax reforms - could generate $29 billion in income tax cuts for workers.

Meantime, the committee's final report also said the design of the discount has the potential to distort the allocation of investment across the economy, with existing homes making up a significant amount of capital gains that benefit from the discount.

Perhaps most damning, though not surprising, was the committee's statement that although there are several factors that influence the housing market, "there is evidence the concessions provided by the capital gains tax discount, in combination with negative gearing, have skewed the ownership of housing away from owner-occupiers and towards investors."

Its final finding was that the benefits of the discount are unequally distributed, which subsequently impacts wealth and intergenerational inequality.

Research by the Australian Council of Social Services found the five highest earning electorates in Australia capture more than 20% of total CGT discount expenditure. The bottom 10 electorates only capture 1.6%.

In a dissenting report, the Opposition described the findings as simplistic and one dimensional, saying it is actually a lack of supply that is driving the housing crisis, and a simple tweak to tax is not a solution.

This view is supported by advice from the Reserve Bank of Australia, citing Treasury and Grattan Institute analysis, which found reducing the discount would have a 'relatively modest' impact on housing prices, with little change to supply.

It was also supported by the Housing Industry Association, which said taxing investors funding the development of more rental properties only worsens housing affordability and would lead to fewer houses, not more.

The Coalition said the current CGT discount is working as intended and should not change.

"It supports more investment, provides an incentive for new construction, and helps boost housing supply. Proposals to weaken or abolish it would not materially improve housing affordability, would reduce the rental stock supply and raise rents, and discourage investment and new construction," its response read.

"Abolition of the CGT discount would discourage new construction, undermine supply, and so push housing prices up. It is simple economics."

The decision to hike was all but split, with five voting members agreeing to hike rates and four voting to leave them on hold.

Interestingly, the board indicated ongoing conflict in the Middle East was not the main factor in its decision, but said it was cautious of the inflationary impact it could cause going forward.

"A wide range of data over recent months have confirmed that inflationary pressures picked up materially in the second half of 2025. While part of the pick-up in inflation is assessed to reflect temporary factors, the board judged that the labour market has tightened a little recently and capacity pressures are slightly greater than previously assessed," the RBA said.

"Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation."

Betashares chief economist David Bassanese said the board's differing views "suggests a rate hike at the next policy meeting in May is not a done deal."

Bassanese added that it reflects the tensions associated with raising rates in the face of a global energy price shock.

"This shock both puts upward pressure on inflation and poses downside risks to economic growth," Bassanese said.

"Some board members clearly felt the mixed economic effects of the energy shock warranted keeping rates on hold, while others, likely including the RBA governor and deputy governor, were more concerned about the upside inflation risks, especially given recent solid GDP and employment reports along with the lift in consumer inflation expectations."

Bassanese said he believes the conflict in the Middle East will have ended by May, meaning oil prices will be materially lower.

"That said, my view is that this would still not be enough to stop the RBA hiking again in May, given the prospect of a further uncomfortably high inflation result for the March quarter, not helped by the elevation in energy costs over recent weeks," he said.

Similarly, Convera lead FX and macro strategist - APAC Shier Lee Lim said the May meeting is now "squarely in play".

"What [the] decision tells us is that the RBA is no longer willing to treat above-target inflation as a problem that time and patience will resolve," he said.

"With the energy shock from the Strait of Hormuz crisis now compounding already-sticky domestic price pressures, the board has effectively concluded that waiting for more data carries more risk than acting on the balance of evidence available."

Lim said that while many in the market - including all four big banks - are anticipating a May hike, he said it is not set in stone.

"I would caution against treating this as a done deal. For May to deliver another hike, we would need to see the Q1 CPI print confirm that inflation remains entrenched in services and housing - and that the energy shock has not materially dented household spending or business confidence," Lim said.

"A faster-than-expected resolution of the Middle East conflict, or a sharp fall in oil prices, could shift the calculus quickly. The RBA has been explicit that this is a data-dependent path, not a predetermined cycle."

Meanwhile, First Sentier Investors senior portfolio manager Ben Samuel believes a May hike is still on the cards.

"Ordinarily, a central bank faced with a fresh conflict in the Middle East might have the luxury of time, weighing the risks to both inflation and activity. The RBA is unfortunately in no such position, having struggled to control stubbornly high inflation in the post-COVID era," Samuel said.

"Much can change between now and the next meeting in May, however the RBA is clearly concerned about inflation expectations, and is for now focussed on addressing this risk.

"The case for further rate hikes remains strong, given sticky inflation and a still-resilient labour market."

National Australia Bank has predicted that inflation could reach 5% by June. Commenting on this possibility, Chalmers told Sky News over the weekend that it depends not just on the severity of this price shock coming out of the Middle East, but also its duration.

"We run a number of scenarios as well, just like the private banks do, we've got a couple of months to finalise the Treasury forecast for the Budget in May, and so obviously we are working through scenarios and contingencies like this pretty much every day as we try and land these forecasts for the Budget," he said.

"We've run a couple of scenarios which make it clear on some realistic assumptions about global oil prices and how that would potentially flow through to inflation and for how long. If we were putting pencils down on those forecasts today, we'd have inflation peaking somewhere between the mid to high fours, which isn't far off some of those private forecasts that you're referencing in your question."

Last week, Chalmers warned of the inflation challenge facing Australia, which has been exacerbated by the US-Israel war on Iran.

As for Australia potentially running out of petrol, Chalmers is confident this will not eventuate.

"That's not something we're expecting, in fact we have really more than enough fuel as it stands right now. We've got big stockpiles of fuel, whether it's petrol or diesel or jet fuel, and we work around the clock to make sure that Australia doesn't run out, we're certainly not expecting that we will," he told the interview.

However, a new Macquarie University study shows that petrol prices have jumped 50 cents a litre on average across Australia since the start of the Iran war.

The country currently has 36 days of petrol supply, 29 days of jet fuel, and 32 days of diesel left in the tank, according to Macquarie Business School senior lecturer Lurion De Mello.

De Mello explained that Iran has effectively closed the Strait of Hormuz, a critical passageway that carries 20% of the world's oil supply, and plunged oil markets into chaos as fears grow about global fuel supplies.

Prices have fluctuated sharply, reaching almost US$120 per barrel in recent days before easing to about US$100 last Friday.

"Hormuz is not just any flashpoint. It handles roughly one fifth of global seaborne oil and LNG supply, meaning even short interruptions can send shockwaves through markets. When the United States and Israel struck Iranian targets, insurers withdrew war-risk cover and freight rates surged to historic highs," De Mello said.

"This combination has turned a long-imagined scenario into a real-time test of global energy security. For Australia, the consequences are particularly acute."

"I've made it really clear that we had an inflation challenge in our economy and developments in the Middle East over the last couple of weeks will make that more challenging rather than less challenging," Chalmers said.

"We've seen already the way that the global oil price has spiked. We've been speaking about what that has meant for petrol prices here in Australia, and there will be flow-on consequences as well."

Chalmers said Treasury is in the process of updating its inflation forecasts which will be released when the government releases the Federal Budget in May.

"Some of the private economists have made their views clear already that they expect there to be additional upward pressure on inflation, and of course, that's something that the government's very focused on as we put this fifth Budget together in two months' time," he said.

Reserve Bank of Australia (RBA) deputy governor Andrew Hauser said right now, the immediate effect on inflation is the cost of petrol.

"Everyone's seeing that in real time today. Of course, over time that pick up in the cost of fuel will push up on prices and costs for firms, and it has implications over the longer term for people's expectations about wages and prices," he said.

"This is a classic adverse supply shock, to use the jargon, which means that higher cost for firms is likely to reduce their output, but it also weakens demand, lower consumption spending, the impact of uncertainty on households and companies type of financial conditions, and that's not just in Australia, but overseas as well."

Hauser added that despite concerns, the economic backdrop in Australia is in "good shape".

"Growth has recovered quite maturely over the past year. Unemployment is close to historic lows and compares very favourably internationally, and average levels of wealth and income in the economy are pretty good by international comparisons. But we have a problem with inflation. It's too high," he said.

"Our projection is that inflation will only return to the target range by the end of this year or into next year, and only back to the midpoint of that target range in 2028 and that's before this oil shock and other events."

HSBC chief economist Paul Bloxham said the ongoing conflict in the Middle East makes things tricky for the RBA.

"The domestic economy is operating beyond its capacity, and inflation is still too high, but the RBA does not know how much effect the hike in February has already had and the Middle East developments create significant uncertainty. There is little domestic economic data that post-dates either of these events," Bloxham said.

"The rise in oil prices related to the Middle East conflict will increase headline inflation but will also weaken growth - as it is a negative supply shock. Core inflation should not rise much, and the central bank could look through it."

However, Bloxham said with the events in the Middle East still being "highly uncertain", forecasting will be more difficult.

"The longer the conflict continues and oil and gas supply are blocked, the more likely it delivers higher energy costs and the more sharply it could weaken global and local growth," he said.

"However, another uncertainty for RBA observers concerns the RBA's reaction function."

Bloxham described Hauser's comments as "fairly hawkish", saying they imply "the RBA is more worried about high inflation than growth concerns - which are now added to by the Middle East events."

All four of Australia's big banks - CBA, ANZ, NAB and Westpac - expect back-to-back 0.25% interest rate rises in both March and May.

Commonwealth Bank head of Australian economics Belinda Allen said the situation has changed quickly.

"After hiking the cash rate in February driven by a fundamental reassessment of the economy, conflict in the Middle East has further threatened the inflation outlook. And at the same time also proposing downside risks to global and Australian growth," Allen said.

"What does a central bank do in this environment? There are arguments that can be made in being cautious and waiting to see how the situation evolves in the Middle East. Certainly, we took this view early last week. But the near-term inflation outlook, we expect, will carry weight given the current state of capacity pressures in Australia and recent commentary from the RBA has focused on inflation."

Allen said because of the concerning economic environment it is likely, at this stage, to expect an interest rate hike in both March and May.

"The debate will be lively, as it should be, ultimately we expect the RBA to focus on inflation and lift the cash rate in both March and May to take the cash rate to 4.35%," she said.

But not all agree, MFS Investment Management fixed income research analyst Carl Ang said while the market is pricing in around a 40% chance of a hike in March, a hold is still expected.

"A March hold by the RBA remains the base but one variable the market doesn't have visibility on is the RBA's business liaison feedback which typically emerges in official communications," Ang said.

"While recent official commentary has been largely balanced on risks stemming from the Iran conflict, there is the possibility of liaison feedback intensifying RBA concerns of cost pressures and price markups that entrenches underlying inflation well above target. This could be one factor that prompts an earlier-than-expected hike. Note our base case remains for a 25bps hike to 4.1% in May."

The conflict in Iran has continued to escalate and concerns are growing around the inflationary effects.

Ten Cap chief investment officer Jason Todd said few could have predicted the timing for the conflict.

"With little warning, the world has been plunged into a war between the US/Israel and Iran. As oil prices have spiked - modestly at first - but more aggressively as supply disruption fears have increased, equity markets have followed a similar path, but on the downside," Todd said.

"To suggest the conflict has escalated uncertainty at a time when markets were already navigating a long list of challenges is an understatement.

"The critical issue for investors is not the headlines themselves, but whether this conflict becomes long-lived enough to impair economic growth or meaningfully alter the inflation and policy outlook. Markets can absorb shocks, but what they struggle with is duration meaning that 'time' is the tipping point for the crisis to manifest itself into an economic shock that matters for markets."

"There was broad based economic growth in the quarter, with rises observed in a large majority of industries. Public and private demand each contributed 0.3 percentage points to GDP growth," ABS head of national account Grace Kim said.

"GDP per capita increased for the fourth consecutive quarter and is now 0.9% higher than a year ago, the highest through the year growth since December quarter 2022."

Deloitte Access Economics partner Stephen Smith said the data is a "case of when good news is actually bad news."

"In the 2025 calendar year, the Australian economy grew by 2%, doubling its 2024 growth rate," Smith said.

"While stronger growth may seem like positive news, it will be a concern for the Reserve Bank (RBA). The RBA is already of the view that the economy is operating above its potential."

Smith added that the central bank may be alarmed that there was no labour productivity growth recorded in the quarter.

"Unless this changes, low growth and high inflation could become entrenched as long-term features of the Australian economy," he said.

"Combined with elevated inflation, today's data will keep the RBA on high alert and increase the likelihood of a rate hike in May."

Smith said the key question to come will be how quickly growth is likely to slow and how policymakers will respond.

"As February's rate hike takes hold, consumers and businesses will rein in spending plans, dampening the outlook," he said.

"Adding to the uncertainty are the events in the Middle East. While it is too early to draw out any economic implications for Australia, if oil prices were to rise substantially over coming months, the resulting inflationary pulse would add a further degree of difficulty to the RBA's task of balancing growth and inflation."

On the more positive side of things, Smith pointed to wage growth, which is growing but slowly.

"One small mercy for Australians worried about another rate hike: the national accounts measure of wage growth recorded its slowest quarterly growth since September 2024," he said.

"This should calm the RBA's fear of an inflationary wage-price spiral."

Meanwhile, Betashares chief economist David Bassanese said the GDP data would not be enough to justify an immediate rate hike.

"Overall, despite the stronger than expected 0.8% gain in headline GDP, the report does not appear to provide the smoking gun the RBA would need to justify a rate hike as early as this month's meeting," he said.

"Adding to the case for caution, at least in the near term, is the surge in geopolitical risks associated with the conflict in the Middle East. While the conflict poses an upside risk to inflation through higher oil prices, it also creates an offsetting downside risk to non-energy inflation if extended hostilities undermine business and consumer confidence both at home and abroad."

Bassanese said at this stage, he believes an RBA hike will rest critically on Q1 CPI which will be released in late April.

"A strong result, with quarterly trimmed mean inflation of 0.8% or more, would likely result in a May rate hike," Bassanese said.

"Evidence of further strong domestic demand in today's Q4 data could have provided grounds for a rate hike this month, though as noted above, that evidence appears lacking."

Speaking at the event - which was held on February 26, prior to US strikes on Iran - Parker said we are moving into a more volatile global environment.

"We are in a less globalised, more volatile, more disrupted, multi polar world, where the geopolitical angle is very much front and centre. We are in a multi polar world where great power competition, in an economic sense, in a defence sense, is going to be a regular and ongoing feature," Parker said.

"The other thing that's worth acknowledging - and we've certainly done a lot of work on this in the last year or two, and speaking to pension funds overseas, they've also done a lot of work on this - is basically looking at the status of the United States in the New World Order. US exceptionalism in an economic and investment sense, we would argue, has peaked."

Parker said that is not to say the US is in decline, but rather the nation is entering an era where it being the "be all and end all, main game" has peaked.

"We're also meant for a more volatile world economy. Our world is more ripe for disruption, whether those disruptions are caused by technology or by climate change or by geopolitics. This is a world where we're going to see more frequent and more severe disruptions," Parker said.

"We also think this is a world where the demands on government to step up and do stuff is not going to go backwards. It's only going to go higher, whether it's to mitigate or to deal with the consequences of climate change, whether it's spending more money on defence, or, frankly, whether it's spending more money in education and training and welfare to help large numbers of people adapt to very, very rapid technological change, the rise and rise of artificial intelligence."

Parker said these increased demands on governments will lead to larger budget deficits, which will be more problematic for some countries over others.

"We frankly, don't see any appetite really anywhere to do anything really meaningful to rein in government budget deficits, certainly not on the United States or indeed, frankly, anywhere else," he said.

Parker added that some of the forces at play that will likely lead to higher government spending are also inflationary and could pose a threat to already sticky inflation in Australia, but also around the world.

"We have inflation that is uncomfortably above target, both here in Australia and a range of other economies. We do think that some of these disruptions that we're seeing, or we think we'll continue to see, are going to be inflationary," Parker said.

"Climate change, greater defence spending, these are fundamentally inflationary forces."

Speaking on the 2026 Financial Standard Economic Outlook webinar, Redican explained what we're experiencing is "burnout economics" - where one presses the car accelerator while having one hand on the handbrake simultaneously, causing the wheels to spin while not going anywhere.

"That is a good example of what is happening in the Australian economy at the moment," he said.

"The federal government has got the foot to the floor on trying to get growth going, whereas the Reserve Bank has the handbrake on, preventing the economy from growing any further."

Redican attributed majority of this structural concern to the Australian housing market.

To continue growth and meet housing demand for the growing population, the federal government has a target to build 1.2 million homes over the next five years, an estimated 25% growth in the supply year-on-year.

"How would the Reserve Bank react to that if housing investment was about to rise by 25%? Already it is saying the economy is at full capacity... They would raise interest rates, I am sure not just once or twice, but probably five or six times," Redican said.

This rise in rates, Redican noted, will have the sharpest impact on the housing market.

"By hook or by crook we are not going to get those homes in place over the next five years, and that's leading to structural impediments to Australian households," he said.

He also noted the rising gap between house prices and the average capacity for households to pay their mortgage rates. House prices have risen from three times household incomes to around seven times in 2026.

"Even though the population is growing rapidly, the amount of housing available to buy is shrinking and it is increasingly the top half of households who have a greater capacity to pay," Redican said.

This, he said, is pushing people to keep renting which is further pushing up rents across the country.

"Rents are the single largest part of the consumer price index basket. This is why inflation remains sticky," he said.

"But of course higher interest rates, which limits the supply of new housing, is probably not the best way to tackle this problem. We need to think differently from the simple kneejerk reaction."

These structural impediments have narrowed Australia's growth trajectory pushing Australian investors to look for opportunities offshore with better returns.

Redican sees Japan, Europe and the US as better prospects for investors as stimulatory fiscal and monetary policies push growth further.

Speaking on the 2026 Financial Standard Economic Outlook webinar yesterday, McMenamin attributed sticky housing inflation and expansionary financial conditions as the main drivers in the headline inflation figures.

Inflation had eased gradually from its pandemic peak in late 2022, falling to 2.7% in the June quarter of 2025. However, it unexpectedly picked up pace in the middle of last year, prompting the RBA to raise interest rates in February to 3.85% in a bid to reign it in.

"A 1% quarter-on-quarter increase in the trim mean measure of inflation that happened two quarters ago is historically rare, outside of the pandemic it's only happened three times before," McMenamin said.

"That isn't something that we think our policymakers should really be willing to ignore quickly."

McMenamin said the housing and market services segment represent a third of the trim mean inflation basket in weight but can explain 80% of the moves in the figures.

"These are the parts of the basket that give underlying inflation a lot of persistence," he added.

The two factors causing the sticky housing inflation include very high housing rents relative to reported numbers along with a rise in wages and material costs in the sector, McMenamin said.

Expansionary financial conditions, including rising housing prices, have also added to the persistent inflation.

"This is just a sign to us that conditions are not tight enough at a time when inflation is clearly well above target," he said.

The key difference, McMenamin noted, between the domestic and other economies around the world is that Australia has a much lower unemployment rate prior to the pandemic. He highlighted that Australia's labour market has proven to be extremely resilient.

"There's almost an excess of demand for labour," McMenamin said.

"The trouble for the RBA is actually reducing demand for labour across the economy and unfortunately causing a slight increase in the unemployment rate. That truly will be what gets inflation back to target."

Barrenjoey expects two rate hikes from the RBA in the months of May and August.

"We're probably a little bit above consensus. The average economist probably thinks they hike only one more time," McMenamin said.

He added that he sees household incomes remaining resilient to the rate hikes. He also remains positive on the housing market.

"We don't think that a couple of rate hikes will do much to slow growth in these capital cities or at least turn it negative. We think growth will slow a bit," he said.

The RBA expects inflation to peak in mid-2026 and moderate to a little above the midpoint of the 2-3% range by mid-2028 as the economy returns to balance.

You can now watch the Financial Standard 2026 Economic Outlook on demand, including presentations from Australian Retirement Trust, Barrenjoey, and TCorp.

Speaking at an event in Melbourne last night, Bullock said there is a fine line in economics between science and art.

"It is an art, but we try to bring a bit of science to it as well... forecasting itself is not easy, it is not a science," Bullock said.

"What you're doing when you're forecasting and modelling is you're summarising the individual decisions of millions of Australians and millions of people around the world and you're trying to put them into single equations and it doesn't work quite like that, it's not a science like that. So, there is a bit of an art to it."

Bullock acknowledged while the data the bank relies on is backwards looking, the RBA board does what it can to use that data as a starting point to determine where the Australian economy is heading.

"We know the data that we are getting is from the past... but that is our starting point and then we have to use what we know about historic relationships, models and those sorts of things to think 'what does this imply going forward?' We're not backwards looking, we are trying to be forward looking. But forecasting is inherently difficult. We have to do it and we do our best," she said.

In terms of where things are heading next, Bullock said there are more risks to the upside currently, but a patient approach is needed.

"I think there was a recognition in February that inflation was now too high, and forecasts were that it wasn't going to come back into target very soon, without some action on financial conditions. So, that is where we found ourselves, with risks more on the upside," Bullock said.

Bullock said currently economic conditions are making forecasting slightly more difficult for the board.

"When we were coming out of COVID and inflation was heading up to 8% and interest rates were zero, there was no doubt what we had to do," Bullock said.

"Now we're in a situation where the labour market, we think it's a little bit tight and inflation is a bit elevated - we don't think it's taking off again, but it's a little bit elevated.

"We're in this position, which is actually quite a good position, where the economy is sort of recovering. And this is where it's difficult.

"The judgments are a little bit more difficult. It's not like we've got a situation where it's very clear what we have to do. We've got ourselves in a position now where it's close to balance, a little bit tight, and that's why people have to be patient."

GSFM market analyst Stephen Miller said Bullock's comments suggest the central bank will leave interest rates unchanged at the March meeting.

"Those comments suggest to me that the current thinking of the RBA Monetary Policy Board is to leave the policy rate unchanged when it meets in March, but that May is a 'live' meeting," he said.

"A 'patient' approach would give the RBA time to assess not only the implications of more inflation data but gain some insight as to how other potential drivers of inflation are unfolding."

"The 3.8% annual CPI inflation to January was unchanged from December," ABS head of prices statistics Michelle Marquardt said.

"Trimmed mean inflation was 3.4% in the 12 months to January 2026, up from 3.3% in the 12 months to December 2025."

The largest contributor to annual inflation in January was housing, up 6.8%, followed by food and non-alcoholic beverages, up 3.1%, and recreation and culture, which rose 3.7%.

VanEck senior portfolio manager Cameron McCormack said following the data, the Reserve Bank of Australia (RBA) is more likely to pause and assess how economic conditions evolve over coming months.

"With inflation remaining outside the target band, and elevated across many components, a May rise is firmly in play," McCormack said.

"However, given the RBA's emphasis on taking a measured approach and preference to move rates on a quarterly basis, we expect policy settings to remain on hold for now, with the board taking additional time to assess incoming data."

McCormack said even though higher interest rates may be on the horizon, markets have already priced them in for the most part, so there are less concerns around rate sensitivity.

"A more cautious stance from the RBA should underpin market confidence. In equities, we see mid-caps as well positioned for potential outperformance this year," he said.

"For investors seeking longer duration defensive exposure, fixed rate subordinated bonds are currently yielding close to 6%. In an environment where policy uncertainty remains and growth is moderating, that yield for defensive exposure is compelling."

BNY APAC macro specialist Wee Khoon Chong agreed today's data suggests another rate rise is likely at the RBA's May meeting.

"Tight labour market conditions and elevated wage growth, alongside ongoing inflationary pressures, are likely to keep the RBA on a tightening path," Chong said.

"The market is currently pricing fewer than two hikes by end-2026, with the next as early as the May policy meeting.

"We see a risk that the RBA turns more hawkish and exceeds market rate expectations. A more hawkish RBA is positive for the Australian dollar; we expect further AUD outperformance versus peers."

Deloitte Access Economics partner Stephen Smith said today's read will make May a "pivotal" month for the economy as the government is also due to hand down the Federal Budget.

"Unless the Federal Budget meets the moment and outlines significant economic and tax reform, growth will stagnate and inflation will persist for longer than necessary," Smith said.

"While the government deserves credit for not continuing the electricity subsidies beyond December, today's spike in headline CPI was always going to be the political payback of a populist policy.

"The RBA is likely to remain cautious and continue its 'wait and see' approach over the next few months as labour market, national accounts and inflation data evolve."

Smith added the May Budget needs to "meet the moment" and outline significant economic and tax reform.

"As living standards atrophy and as the Reserve Bank wrestles with limp supply growth, it is fiscal policy that holds the key to lifting the pace of growth and bringing inflation back to target," he said.

For more economic insights, including from Australian Retirement Trust's Brian Parker, the 2026 Financial Standard Economic Outlook webinar takes place tomorrow at 11:00am AEDT. Register here.

RBA head of economic analysis department Michael Plumb struck a slightly more positive tone than the RBA board gave off in the Statement on Monetary Policy.

Plumb said the central bank believes inflation has been driven higher by sector-specific pressures, which it expects will ease in the coming quarters.

Inflation had eased gradually from its peak in late 2022, falling to 2.7% in the June quarter of 2025. However, it unexpectedly picked up pace mid last year, prompting the RBA to raise interest rates in February to 3.85% in a bid to reign it in.

The RBA had either cut or kept the cash rate on hold in the prior 17 consecutive meetings.

"Some of the pick-up in inflation in the second half of 2025 was driven by increases in the prices of travel and fuel, which tend to be volatile; we expect the prices of these items to ease in early 2026," Plumb said.

Additionally, some of the unanticipated rise in inflation was driven by price dynamics in the housing and retail sectors. In late 2024 and early 2025, homebuilders and retailers resorted to discounting and promotions to tackle soft demand, Plumb said. As demand conditions improved, it also saw a dial back in heavy discounts.

"It is possible that these dynamics were pushing down on aggregate inflation in late 2024 and early 2025, but then subsequently accentuated the pick-up in aggregate inflation in the second half of 2025 as they unwound," he said.

Plumb also highlighted greater capacity pressures in the labour market - and the economy more broadly - contributed to the unexpected pick-up in inflation. This, he said, was due to higher aggregate private demand in the economy.

Some of the reasons for strong private demand included a resilient global economy, strong domestic financial conditions, stronger-than-expected real household incomes and a jump in data centre investments.

Australia has recently seen a rise in data centres as global companies expand infrastructure to meet the compute demand for AI expansion.

"According to the latest capital expenditure survey and our liaison contacts, firms have recently upgraded their investment plans, especially in areas like utilities, energy, data centres and related technology, and non-residential construction more broadly," he said.

While Plumb noted the RBA does not expect the increase to continue in coming quarters at the same rate, strength in business investment in the sector is expected to be maintained in the near term.

RBA forecasts a slowing in GDP growth from late 2026 which would help ease capacity pressures and further ease inflation from mid-year.

The response by the President came within a day of him announcing a 10% global tariff on Friday after the court's decision. The tariff will be an increase for Australia, which currently has a levy of 10% on its exports to the US.

Trump, on his Truth Social account, said: "I, as President of the United States of America, will be, effective immediately, raising the 10% Worldwide Tariff on Countries, many of which have been 'ripping' the U.S. off for decades, without retribution (until I came along!), to the fully allowed, and legally tested, 15% level."

"During the next short number of months, the Trump Administration will determine and issue the new and legally permissible Tariffs, which will continue our extraordinary successful progress of Making America Great Again - GREATER THAN EVER BEFORE!!!"

This is, however, an interim tariff and will require Congressional approval within five months, Betashares said.

"With Republicans having only slim majority, the omens are not good.  It will only require a few Congressional members to find their backbone in the same way that a majority of Supreme Court judges have done," Betashares chief economist David Bassanese said.

Under the Supreme Court ruling, tariffs imposed for fentanyl trafficking and reciprocal tariffs imposed on most trade partners are now considered unlawful.

Barclays said the decision excludes the Section 232 sectoral tariffs on commodities like steel, aluminum, autos, copper, trucks, lumber and the Section 301 tariffs on China.

The decision to strike down the tariffs by the court was not unexpected with markets pricing the outcome with a 75% probability, Barclays said.

The Supreme Court stayed silent on the matter of providing a refund on the tariffs to trading partners. Barclays estimated about US$175 billion of tariffs has been collected since April and is, thus, subject to refunds.

"While we think refunds will materialise, the process could be dragged out and messy, i.e., we would not expect a single large transaction to all importers at one time," Barclays said.

Bassanese said the reality of Trump's long held desire to assault the global trading system through tariffs was always legally dubious.

"US Presidents simply don't have the legal power to wield tariffs as a weapon of global coercion in the way Trump desires - the only question is whether the Supreme Court would be cowered into letting Trump get his way. It was not," he said.

He added that trading partners may now feel more emboldened to threaten retaliation and the ruling has effectively dealt a 'body blow' to Trump's tariff strategy.

Trump in his social media post said the decision by the highest court was "ridiculous, poorly written, and extraordinarily anti-American".

The Australian share market dropped by as much as 0.5% by midday today while the Aussie dollar extended its gains for the week.

MFP decreased by 0.5% over 2024-25, below the 20-year average of 0.4% growth per year and well below the 1.6% annual average increases between 1994-95 to 2003-04.

At an industry level, agriculture, forestry and fishing led MFP growth at 10.4% over the last year. Mining saw its fifth consecutive year of declining MFP and had the largest fall of any industry in 2024-25 at 3.2%.

Productivity Commission (PC) research economist Joseph Christensen said increasing capital investment is key to addressing our labour productivity problem.

"With greater access to capital, such as equipment or software, workers can produce more of the goods and services we consume. However, we also need to ensure that we are investing in the right capital and using it effectively," Christensen said.

Christensen said more investment is important, but what Australia invest in and how the country use it also matters.

"Australia is performing better than average in this area, but there is always room for improvement," he said.

"Recent research on innovation shows that very few Australian firms create new-to-world technologies, and the rate at which Australian firms are adopting cutting-edge technologies at the productivity frontier has slowed."

Christensen added that Australian market sector research and development investment as a proportion declined by more than 40% between 1995 and 2025.

"New types of capital are less likely to exhibit diminishing returns, so improving technological innovation can offset the decrease in capital productivity coming from accumulation and improve labour productivity at a given level of capital intensity," he said.

"The PC has previously recommended that governments improve Australia's tax and regulatory systems to support innovation and provide free or low-cost access to research to increase the diffusion of ideas across all firms."

Christensen said it is "vital" Australia use existing capital as effectively as possible, saying evidence suggests capital reallocation from less to more productive firms in Australia has become slower and less efficient over time.

"Although most of the capital stock in Australia is privately owned, governments can improve the ways that firms allocate and manage capital resources, including by strengthening competition and increasing access to finance," he said.

"Further research into firm practices and economic conditions in countries like the Netherlands and the United States could show how Australia can better use its capital to increase productivity and improve living standards."

"The unemployment rate remained steady at 4.1% in January. Employed people grew by 18,000. Full-time employment rose by 50,000 people, partly offset by a fall of 33,000 people in part-time employment," ABS head of labour statistics Sean Crick said.

"The participation rate of 66.7% was 0.6 percentage points lower than the record high measured in January 2025."

Couple today's data with yesterday's wage rise of 0.8% for the quarter and 3.4% annually and economists say the data was in line with expectations.

"Today's labour market data broadly supports the view that conditions remain close to balance, although some residual tightness persists. That said, turn-of-year labour market prints tend to be volatile, and further data over the coming months should offer a clearer read on underlying trends," State Street Investment Management APAC economist Krishna Bhimavarapu said.

"Focus now shifts to the January CPI release next week, with markets watching whether the firmer-than-expected labour backdrop is feeding into inflation via capacity constraints.

"So, any upside surprise could trigger a material front-loading of expectations for the Reserve Bank's next rate hike, while a downside surprise is unlikely to meaningfully alter current pricing."

Betashares chief economist David Bassanese said the "solid gain" in employment following the strong rise in December confirms the labour market is positive news.

"The ongoing strength in the labour market data is consistent with a modest strengthening in a range of hiring indicators late last year," Bassanese said.

"From the RBA's perspective, the failure of the labour market to weaken means it will not be able to shift its gaze away from upcoming inflation data."

Bassanese said looking at the RBA's own forecasts, where it expects another relatively strong increase to trimmed mean inflation, another interest rate rise will be on the cards for May.

"The only reprieve for concerned mortgage holders would be a notable decline in inflation, which is possible if last year's price gains were driven more by one-off factors than by underlying demand pressures," he said.

The updated data revealed that the forecasted deficit for the current financial year edges slightly over $3 billion, with the deficit improving to just over $1 billion in FY27.

Along with a bigger surplus, the review projects a lower funding requirement compared to the June 2025 budget papers. The forecast borrowing requirement for 2025-26 is now $21.8 billion, down $2.4 billion, and $21.6 billion in 2026-27, down $4 billion.

The downward trajectory in issuance is helping the government achieve its objective of a sustainable gross debt position around 20% of gross state product, TCorp noted.

Meanwhile, projected revenue growth of 3.9% per annum over the forward estimates is driven by stronger stamp duty revenue and OneFund performance, which has a balance of $70.4 billion at the end of calendar year 2025.

OneFund combines several of the state's investment funds to strengthen its balance sheet, leading to improved investment returns and building long-term value for future generations, TCorp explained.

Together with projected revenue gains, it enables effective management of the state's interest expense and investment in key services such as housing, health and education. It also supports smaller, more manageable infrastructure spending - equivalent to about 2% of gross state product - on road and rail networks.

The state government also remains committed to its two key fiscal principles: returning to a sustainable operating position and stabilising to maintain a sustainable debt position.

Although there are continuing risks from the geopolitical environment, including increased expenditure, the government has been able to implement its agenda, managing expense growth and strengthening the state's revenue base, TCorp said.

There has been a net increase of $1.4 billion in expenditure - totalling $129.0 billion in FY26 - with employee expenses now accounting for $50.8 billion (or 39.4%), an increase of $1 billion since the June update.

"A fiscal strategy delivered over the long term, coupled with a strong credit rating profile, will continue to make NSW an attractive issuer for investors," TCorp said.

"In a world increasingly characterised by volatility and churn, consistency and predictability become prized and sought-after commodities."

In its Statement on Monetary Policy (SoMP), the central bank expects GDP growth to pick up slightly in the near-term before declining to just 1.6% through to June 2028.

"On the assumption that the cash rate follows the market path, Australian GDP growth is projected to pick up further in the near term, before declining to below estimates of potential growth," the SoMP said.

The RBA projects that from late 2026 onwards, GDP growth is expected to be lower than in the November SoMP and below its estimate of potential growth, with the higher assumed cash rate path beginning to weigh on private demand and GDP.

"The forecasts are conditioned on the market path for interest rates, with market participants expecting the cash rate to increase by around 60 basis points; by contrast, the November forecasts assumed the cash rate would decline by a further 30 basis points," the SoMP said.

"The outlook for dwelling investment growth has been revised lower in response, due to both the direct effects of higher interest rates and because of slower housing price growth over the forecast period.

"The outlook for household consumption growth and non-mining business investment in 2027 have also been revised down."

The RBA is also anticipating the unemployment rate will increase gradually to reach 4.6% by mid-2028.

"Leading indicators such as job ads, vacancies and employment intentions suggest labour market conditions could ease a little in the near term, although this is balanced by the stronger near-term outlook for activity," it said.

"Taking these points together, we expect labour market conditions to remain stable over the next few quarters. From late 2026, the unemployment rate is forecast to rise gradually, reflecting the slowing in GDP growth over 2026. The underemployment rate is also expected to edge a little higher."

This comes after Treasurer Jim Chalmers was forced to defend his government's spending after RBA governor Michele Bullock said increased government spending put pressure on inflation.

When questioned about government spending, Chalmers said "political opponents and their acolytes are deliberately and dishonestly trying to conflate two different things".

"The question isn't whether public demand can create inflationary pressures; the question is whether it did towards the end of last year, pushing up inflation higher than anyone would like and causing the independent Reserve Bank to hike interest rates during the course of last week," Chalmers said.

"Now, the point that the governor made... the point that I've made consistently throughout the week, is that the thing that surprised the Reserve Bank on the upside towards the end of the year was the recovery in private demand. The Reserve Bank governor actually pointed out that public demand retreated quicker than they were anticipating."

Despite his pushback, when further pressed on the issue of increased government spending Chalmers did concede it has grown.

According to the Mid-Year Economic and Fiscal Outlook documents, government expenditure will peak this year at 26.9% of the country's GDP.

Chalmers said addressing persistent inflation will be a primary influence on the Federal Budget that will be handed down in May.

"The Budget will be about productivity. We're working up a productivity package. There will be a savings package that we're working on. We'll consider whether more steps can be taken on tax reform," he said.

"But overall, it will all be about lifting the speed limit on the economy, making sure we can grow quicker with lower inflation, attracting investment, dealing with intergenerational issues, and also continuing to get the Budget in better shape."

The grilling came off the back of the Monetary Policy Board upping the cash rate target by 25 basis points to 3.85% on Tuesday.

At a hearing of the House of Representatives Standing Committee on Economics this morning, Liberal Minister for Cook Simon Kennedy sought to get to the bottom of what exactly is driving excess demand that has led to inflationary pressures.

Citing Mid-Year Economic and Fiscal Outlook (MYEFO) documents, government expenditure will peak this year at 26.9% of the country's GDP.

"According to Treasury's documents, government expenditure, excluding expenditure during Covid, will never be higher than this year as a percentage of the economy. It is the highest it will ever be excluding Covid in 30 years," he said.

Posing the question to RBA governor Michele Bullock, Kennedy asked: "Does government expenditure influence aggregate demand?"

"Yes," Bullock replied, explaining that aggregate demand in the economy is the combination of private sector demand, which is consumption, investment, and public demand across federal, state and local governments.

However, on Tuesday, Kennedy pointed to Treasurer Jim Chalmers referencing the RBA statement that makes no mention of government spending.

"But then he goes on to say it's not a factor in the decision they took [Tuesday]," Kennedy said.

In response, Bullock tried to direct the conversation back to public and private demand.

Cutting Bullock short, Kenney said: "I know you're going back to private public demand, but it's the truth that in private demand, there's government transfer - so government expenditure. What I'm focused on is government expenditure... Public demand has come off a little bit. But what that obscures is that in government expenditure, government expenditure actually shows up in private demand, does it not?"

Bullock replied: "Yes, it does. Because what it often does is it transfers money to people and gives them money to spend."

Kennedy further pointed out that Chalmers appears not wanting to admit that government expenditure is the highest it's ever been in 30 years.

He said: "I keep talking about private demand and public demand - that obscures the fact that government expenditure, which is in public demand and private demand, with electricity rebates, with all these other things that don't show up public demand..."

"And what [Chalmers] said here is, if you look at the Reserve Bank statement today, it does not mention government spending. He's not talking about public demand. He's talking about government spending. It is not a factor in the decision they have took today.

"I want to talk about the Treasurer's words, not your words."

Bullock fired back: "Well, I don't have a view on the Treasurer's words."

The RBA had either cut or kept the cash rate on hold for the past 17 consecutive meetings.

In announcing the decision, RBA governor Michele Bullock said persistent inflation concerns led to the rise.

"While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025," Bullock said.

"The board has been closely monitoring the economy and judges that some of the increase in inflation reflects greater capacity pressures. As a result, the board considers that inflation is likely to remain above target for some time."

VanEck head of investments and capital markets Russel Chesler said the RBA had no real choice but to pull the trigger on higher interest rates.

"While the move was widely expected, it marks a clear escalation in the fight against inflation. With annual inflation still running at 3.8% as at December 2025, the RBA is a long way from declaring victory, and one rate rise alone is unlikely to do the job," said Chesler.

"What makes this decision more consequential is that the economy is showing few signs of cooling."

KPMG chief economist Brendan Rynne said the move is a "more aggressive" approach from the central bank in the fight against inflation.

"The circumstances of noisy data, transitory cost influences and steady (albeit soft) downwards pressure at the current marginally contractionary cash rate lost over the alternative of a whipsaw response to the recent rise in inflation. This sends a strong message to households and businesses to temper spending in this tight supply environment," Rynne said.

"Importantly the RBA cannot be the only dog in this inflation fight. Government spending, which has been adding to aggregate demand at the margin, needs to also be reined in to help better balance the demand and supply pressures driving the current push up in inflation."

PIMCO executive vice president and head of Australian portfolio management Adam Bowe said a more cautious approach to monetary policy may be on the horizon in the coming months.

"We consider the current cash rate as restrictive, and expect that overtime it will cool demand and bring inflation back into the 2-3% target band. If RBA chooses to tighten policy modestly further to bring inflation down more quickly, we do not think they will need to lift the cash rate to the prior peak of 4.35% given the modest overshoot in inflation this time," Bowe said.

"With the market pricing the cash rate back above 4% and yields on 10-year Australian Commonwealth Government Bonds reapproaching the highs of the past 15 years we think there is considerable value in Australian duration."

The fact that Australia "breaks out in inflation sweats" when it is growing at 2.3% points to a more fundamental problem in the economy, Deloitte Access Economics partner Stephen Smith said, noting the "poor capacity" to produce goods and services, as well as the low run rate.

"That we are here is an indictment on the piecemeal and lacklustre nature of reform over the last three decades," he said.

"The focus from here should be on lifting the capacity of the economy and its run rate though a strategic supply side reform effort."

He urged the government to use the upcoming Federal Budget to incentivise investment, especially by the private sector, to drive productivity.

"If you look at the market-wide numbers, both Australia and the US were up between 1-2% in January, so that's a reasonable month. But if you look at the detail, it actually feels a lot stronger than that. Markets are suggesting that the US economy is actually really taking off," Colosimo said.

"If you look by sector, it's all the cyclical sectors that are leading the US higher - energy up 14%, materials more than 8%, industrials and consumer stocks have also been strong, the transport sector up 5%, small caps really outperforming the large caps (they were up more than 5%).

"All those signals, you would usually associate with an acceleration in growth. So, the market is suggesting the US economy is getting much stronger."

Colosimo added that commodity prices have also been surging, something that is consistent with a stronger economy.

"At one point, the price of gold was up more than 30% in the month, and it has more than doubled since this time last year. It did plunge late last week when [US] President [Donald] Trump nominated a new [US Federal Reserve] chair but that's still up more than 13% in the month," he said.

Despite the positive sentiment, Colosimo said it's not all good news, saying the market is a little hot.

"From the outset, I would say that all-time highs in equity markets are not a concern of themselves, and when things are hot, they can actually run hot for a lot longer than you think. So, it's not like I think there's necessarily something around the corner, but when everybody is this positive, I'm personally inclined to be a bit more cautious," he said.

"If you read economic commentary, universally it expects a strong US economy, very little risk of recession. If you look at sentiment indicators, there's a lot of confidence around that share markets will be strong this year."

The nomination comes at a time of contention between the President and Powell. Last month the US Department of Justice served the Fed with grand jury subpoenas, threatening a criminal indictment over testimony Powell gave at the Senate Banking Committee in June 2025.

The testimony was related, in part, to a multi-year project to renovate historic Federal Reserve office buildings. However, Powell - and 12 other central bank leaders - believe the move from the Trump administration was less about his statement, and more an act of political pressure and intimidation from the Trump's administration, which has been pushing for the Fed to lower interest rates.

In making the nomination, the White House said Warsh is "exceptionally well-prepared to lead the world's most influential central bank."

He has held roles as a Morgan Stanley executive in the mergers and acquisitions team, was an economic advisor to the Bush Administration, and was the youngest-ever Federal Reserve Governor, serving from 2006 to 2011.

Warsh was a finalist for the job in 2017, when Trump instead appointed Powell.

Commonwealth Bank economist Harry Ottley said sentiment around the nomination is that a Warsh-led central bank would be more likely to give in to Trump's whims when it comes to setting interest rates.

"The move reflected views Warsh may be less supportive of aggressive easing and more focused on inflation and balance-sheet discipline," Ottley said.

Chalmers said the reforms target the excessive use of debt deductions to avoid paying tax in Australia, saying they are in line with the OECD's best practice guidance.

"These reforms are all about ensuring multinationals pay a fairer share of tax in Australia," Chalmers, Mulino and Leigh said in a joint statement.

"When multinationals exploit loopholes to pay less tax, they're gaining an unfair advantage over local businesses."

As part of the independent review, the board will consider the overall performance of the amendments in strengthening Australia's thin capitalisation rules.

The board will undertake public consultation to inform its final report, which the government requested it provide within 12 months.

The independent review of the thin capitalisation reforms is a statutory requirement, stipulated when the legislation passed in April 2024.

"The three big economic priorities for the Albanese Government this year are addressing inflation, productivity and global uncertainty, and ensuring multinationals pay a fairer share of tax through reforms like these is an important part of our agenda," the joint statement read.

In conducting the review, the board will assess whether the amendments are operating in a manner consistent with the policy intent, which was to strengthen Australia's thin capitalisation regime to address risks arising from the use of excessive debt deductions, informed by the OECD's best practice guidance.

The board has been requested to consider the overall performance of the amendments in strengthening Australia's thin capitalisation regime to address risks arising from the use of excessive debt deductions; any minor and technical drafting changes which are necessary for the practical administration of the laws, with a particular focus on the third-party debt test provisions and related undefined legislative terms; and if the $2 million exemption threshold should operate as a net debt deduction concept.

It will also consider whether the default tax EBITDA calculation operates to appropriately reflect an entity's economic activity in the income year and across multiple income years, as intended, and the practical impact on the cost of complying with the debt deduction creation rules after restructures, including whether the rules have effectively discouraged debt creation schemes.

"Our responsible economic management was brought to the fore in the mid-year budget update - another $20 billion in savings, improving the budget bottom line in every year of the forward estimates, getting the Liberal debt down, that's been the story of this government," Chalmers said.

"And the story of 2025 and our economy was public spending - public final demand - retreating and its place being taken by private final demand, by private investment and private spending."

Chalmers has been open about his mission to increase productivity in Australia with his sights set on increasing private investment to help boost the economy. He said the May Budget will also focus on rolling out more cost-of-living relief for Australians doing it tough.

"Obviously, when we put the Budget together in May, we will take into consideration the prevailing economic conditions. We don't write that Budget in January, but clearly, the inflation data... will have a very substantial bearing on the budget settings that we determine in the lead-up to the release of the Budget in May and that's what we've done in every budget update," he said.

"Inflation is one of the three key determinants and influences on the Budget that Katy Gallagher and I will deliver in May. Inflation in the near term - we're still expecting inflation to moderate over the next 12 months or so - inflation in the near term, the productivity challenge, which has been a feature of our economy in recent decades and a big part of our focus since the last election.

"And thirdly, all of this global economic uncertainty which is accelerating as the world becomes more volatile. They will be the three key influences on the budget."

Chalmers said the Budget will also deliver "reform and repair" along with some changes to the tax system.

"There will be reform in the Budget, there will be more budget repair in the Budget as well and those two things will happen alongside us rolling out this cost-of-living relief in the form of two more tax cuts, a standard deduction in the tax system, in addition to all of that cost-of-living relief which is rolling out right now," he said.

The rate hold comes in the wake of the US Department of Justice serving the Fed with grand jury subpoenas, threatening a criminal indictment over testimony Fed chair Jerome Powell gave at the Senate Banking Committee in June 2025.

The testimony was related, in part, to a multi-year project to renovate historic Federal Reserve office buildings. However, Powell and 12 other global central banking leaders felt the potential indictment was a show of force from US President Donald Trump who has been outspoken about his desire for the Fed to cut rates.

As a result of the hold overnight, GSFM market analyst Stephen Miller said the Trump administration will be frustrated.

"Of course, that won't please the White House but with US economic activity growth exceeding expectations and inflation still exhibiting some 'stickiness' the decision to leave the policy rate unchanged is eminently defensible," Miller said.

In announcing the decision, the Fed noted that "economic activity has been expanding at a solid pace" but that "job gains have remained low" even if "the unemployment rate has shown some signs of stabilisation" and inflation "remains somewhat elevated".

"In essence [the] decision reflects some anxieties around ongoing inflation in the system, even if those anxieties are slowly dissipating as disinflation continues in the service sector and tariff effects wind their way through the goods sector," Miller said.

Powell also gave a press conference after the decision where, while he did not name Trump, he delivered a poignant message.

"My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people," Powell said.

"We are well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks. Monetary policy is not on a preset course, and we will make our decisions on a meeting-by-meeting basis.

"We remain committed to supporting maximum employment, bringing inflation sustainably to our 2% goal, and keeping longer-term inflation expectations well anchored. Our success in delivering on these goals matters to all Americans. We at the Fed will continue to do our jobs with objectivity, integrity, and a deep commitment to serve the American people."

"The 3.8% annual CPI inflation to December was up from 3.4% to November," ABS head of prices statistics Michelle Marquardt said.

The largest contributor to annual inflation in December was housing, up 5.5%, followed by food and non-alcoholic beverages, up 3.4%, and recreation and culture, which rose 4.4%.

VanEck head of investments and capital markets Russell Chesler said the read will not be favourable to the Reserve Bank of Australia (RBA) board, which will meet next week for its first interest rate decision of the new year.

"Inflation remains uncomfortably higher than the RBA would like and while there was a modest pull-back in the previous reading to 3.4%, we're well and truly outside of the RBA's target band of 2% to 3%. Year-on-year inflation is at 3.8% and the trimmed mean has increased to 3.3%," Chesler said.

"Inflation is not moving decisively in the right direction. With unemployment still low at 4.1%, household spending resilient and property prices continuing to rise, it is no longer a question of if rates move higher, but when the RBA acts and how many hikes ultimately follow this year."

Chesler added that while the market was pricing in two rate hikes this year, the mentality was that the first hike would come in May, though he concedes this has now changed.

"The market has been predicting two rate hikes this year with the first in May but at this level of inflation, the first rate hike could be sooner - possibly even at next week's RBA meeting," he said.

"A number of factors are continuing to put upward pressure on prices. Electricity costs remain elevated, new dwelling construction costs are proving slow to unwind, and higher global tariffs are beginning to flow through supply chains into consumer prices. Services inflation also remains sticky, which historically has been one of the hardest components to bring back under control."

Betashares chief economist David Bassanese said the inflation figures have all but guaranteed two rate hikes this year, with the first likely coming in February.

"All up, it appears to be game, set and match for a rate rise at the February policy meeting. My base case is that the RBA will raise rates by 0.25%, taking the cash rate to 3.85%," he said.

"What's more, if the March quarter 2026 CPI report is also firm (with trimmed mean quarterly inflation of 0.8% or more), the RBA might also raise rates again at the May policy meeting.

"To my mind, two rate hikes - given our highly indebted and interest-rate-sensitive economy - should be more than enough to dampen economic growth again and rein in ongoing inflation pressures in areas such as housing, travel and hospitality."

However, the Australian Council of Social Service (ACOSS) acting chief executive Jacqui Philips said another rate rise would threaten thousands of jobs and increase financial stress.

"The living standards of people on low and modest incomes have been decimated over the past few years due to inflation, higher unemployment, weak growth in incomes and higher interest rates," Phillips said.

"Lifting interest rates next week would worsen the pain and pose a greater threat than temporary inflation fluctuations."

As a result, ACOSS is calling for action to protect people doing it toughest, with a lift to JobSeeker and related payments to keep people out of poverty and investment in energy efficiency for households to cut bills.

"Higher interest rates lead to increased unemployment and are too great a price to pay. We remind the RBA that it has a dual mandate - to promote employment as well as curb inflation," she said.

"Inflation should be tackled through direct support and targeted measures that address price rises at their source."

The unexpectedly robust employment numbers have added to the possibility of a Reserve Bank of Australia (RBA) interest rate hike back when the board meets for the February meeting.

BetaShares chief economist David Bassanese said while the report "does not guarantee a Reserve Bank interest rate hike," it makes next week's inflation report "even more [of] a 'make or break' moment."

The numbers shocked, with a 65,000 bounce back in employment for December 2025, following a recorded 29,000 decline in employment during November of the same year.

The participation rate inched towards 66.7% from 66.6% in November, seeing the unemployment rate drop to 4.1% from 4.3%.

"While monthly labour force data can be volatile and subject to noise, the December report aligns with the RBA's assessment that labour market conditions remain tight," IG market analyst Tony Sycamore said.

"It also validates feedback from RBA liaisons suggesting that a significant share of firms continue to experience difficulty sourcing labour."

VanEck head of investments and capital markets Russel Chesler said: "We're now closer to an RBA rate rise," VanEck head of investments and capital markets Russel Chesler said.

"The unemployment rate has been in a tight range of 3.5% to 4.4% for more than four years, and it continues to be at historic lows overall."

Chesler said while this indicates that Australians are fully employed and the economy is robust, inflation levels are still too high for the RBA.

With the fall in unemployment being the strongest indicator of labour market health, Bassanese said, the RBA's concerns about labour market tightness have not been subdued.

The global economic and markets research team at the Commonwealth Bank of Australia (CBA) also agreed that with evidence showing the labour market has tightened, the likelihood of the RBA increasing the cash rate to 3.85% in February has become more material.

Sycamore added: "The RBA's key concern here will be that this tightness will feed into wage growth and, more broadly, into inflation within an Australian economy where price pressures are already uncomfortably high."

"[The] red-hot jobs report has dramatically increased the chances of an RBA rate hike at its February 3rd board meeting with even an in-line Q4 inflation reading next week not guaranteed to ensure an 'on hold' RBA decision in February."

Although, Bassanese said that the volatility distils to an average monthly employment gain of 18,000 over those two months, "suggesting the labour market remains firm rather than red-hot and somewhat softer than earlier last year."

Despite this difference, sentiment among economists and analysts is generally aligned that the decrease in unemployment will tip the scale in favour of a spike in interest rates.

The report revealed that instead, they hit the American economy itself. The Kiel Institute found importers and consumers in the US bear 96% of the tariff burden.

Although the US government intended the tariffs to target foreign businesses, the policy actually harms the domestic economy, Kiel Institute research director Julian Hinz said.

"The tariffs are an own goal. The claim that foreign countries pay these tariffs is a myth. The data show the opposite: Americans are footing the bill," Hinz said.

Hinz said the tariffs act like a consumption tax on imported goods. At the same time, both the variety and volume of available products decrease.

The research team analysed more than 25 million shipment records covering a total value of almost US$4 trillion in US imports.

The findings determined that US customs revenue increased by approximately US$200 billion in 2025; foreign exporters absorbed only about 4% of the tariff burden, 96% passed through to US buyers; and trade volumes collapsed, but export prices did not fall.

The study also examined the unexpected tariff hikes imposed on Brazil and India in August 2025: tariffs on Brazilian imports were suddenly raised to 50%, and for India, from 25% to 50%.

The data found foreign exporters did not lower their prices to offset the additional tariffs. The research found that had exporters absorbed the tariffs, their US prices would have fallen relative to other markets, but this was not the case.

"We compared Indian exports to the US with shipments to Europe and Canada and identified a clear pattern," Hinz said.

"Both export value and volume to the US dropped sharply, by up to 24%. But unit prices - the prices Indian exporters charged - remained unchanged. They shipped less, not cheaper."

The research warned that ultimately, these findings mean US companies will be confronted with shrinking margins and consumers with higher prices in the long run. Additionally, countries that export to the US will sell less and will be under pressure to find new export markets.

In its more recent World Economic Outlook (WEO), the IMF said headline global inflation is expected to fall to 3.8% in 2026 and 3.4% in 2027.

"This is virtually unchanged from that in the October 2025 WEO, with overarching trends of softening demand and lower energy prices remaining intact," the IMF said.

Divergence between the United States and most other countries lingers. With pass-through from higher tariffs gradually materialising, US core inflation is projected to return to the country's 2% target during 2027.

"Australia and Norway are also projected to see some drawn-out persistence in above-target inflation," it said.

The IMF said central banks must tailor monetary policy to uphold price stability amid ongoing shifts in the global economic landscape.

"Monetary policymakers in countries where inflation is at or close to target should rely on a forecast-centered approach and, if their countries are experiencing negative demand shocks, might consider a gradual reduction in policy rates to cushion economic activity, provided that risks to price stability objectives are contained," the IMF said.

"By contrast, where inflation is still above target, a more cautious approach that maintains data dependence is warranted. In economies experiencing adverse supply shocks, policymakers face complex trade-offs in balancing the risk of growth slowdown against the risk of persistent inflation.

"In such cases, further monetary easing should proceed only with robust evidence of inflation expectations remaining anchored and inflation returning toward target, with the need to remain focused on price stability being vital."

The Reserve Bank of Australia is set to make i's first interest rate decision of 2026 on February 3. Due to persistent inflation, many economists are predicting a 25 basis point interest rate hike at that meeting.

Released ahead of the annual World Economic Forum kicking off on January 19, the Global Risks Report lays out the worst-case scenarios facing investors and business leaders.

Geoeconomic confrontation emerged as the biggest threat to a global economy in the short term that could potentially further destabilise businesses and societies. This incidentally leads to concerns over an economic downturn, rising inflation and potential asset bubbles as countries face high debt burdens and volatile markets.

"In a world already weakened by rising rivalries, unstable supply chains and prolonged conflicts at risk of regional spillover, such confrontation carries systemic, deliberate and far-reaching global consequences, increasing state fragility," the report read.

Misinformation and disinformation, societal polarisation, extreme weather events and state-based armed conflicts are the next biggest risks on the index.

Cyber insecurity comes in sixth place, followed by inequality and the erosion of human rights.

"The next two years are likely to see the continuing convergence of a set of economic and financial

challenges, in some cases building for decades and that seem to be accelerating," the report said.

Over the next 10 years, however, environmental challenges are poised to unleash the biggest threats.

Extreme weather events top the rankings, followed by biodiversity loss and ecosystems potentially collapsing and critical changes to the earth's systems.

The report points out the effect continued extreme weather and climate change will have on ageing infrastructure - ranging from supply-chain chokepoints to strains on electrical grids - saying that critical infrastructure requires renewed attention, with the current risks already playing out and affecting societies globally.

"Modern economies' critical infrastructure is becoming increasingly vulnerable to both chronic climate risks, such as sea-level rises, and acute extreme weather events, including extreme heat, forest fires, floods and storms," the WEF warned, adding that impacts of extreme weather events on critical infrastructure could become permanent.

The report also highlights the benefits and adverse outcomes of artificial intelligence (AI) technologies, particularly as companies spend big on it yet returns on ambitious projects remain unclear.

"Technological developments and new innovations are driving opportunities, with vast potential benefits from health and education to agriculture and infrastructure, but also leading to new risks across domains, from labour markets to information integrity to autonomous weapons systems," the WEF said.

This week, the US Department of Justice served the Fed with grand jury subpoenas, threatening a criminal indictment over testimony Powell gave at the Senate Banking Committee in June 2025.

The testimony was related, in part, to a multi-year project to renovate historic Federal Reserve office buildings.

However, Powell - and now other central bank leaders - believe the move from the Trump administration is less about his statement, and more an act of political pressure and intimidation from US President Donald Trump's administration.

"We stand in full solidarity with the Federal Reserve System and its chair Jerome Powell. The independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve," the combined statement read.

"It is therefore critical to preserve that independence, with full respect for the rule of law and democratic accountability. Chair Powell has served with integrity, focused on his mandate and an unwavering commitment to the public interest. To us, he is a respected colleague who is held in the highest regard by all who have worked with him."

Those who signed the letter with Bullock include Christine Lagarde, president of the European Central Bank on behalf of the ECB Governing Council; Andrew Bailey, governor of the Bank of England; Erik Thedéen, governor of Sveriges Riksbank; Christian Kettel Thomsen, chair of the board of governors of the Danmarks Nationalbank; Martin Schlegel, chair of the governing board of the Swiss National Bank; Ida Wolden Bache, governor of Norges Bank; Tiff Macklem, governor of the Bank of Canada; Chang Yong Rhee, governor of the Bank of Korea; Gabriel Galípolo, governor of the Banco Central do Brasil; François Villeroy de Galhau, chair of the board of directors of the Bank for International Settlements; and Pablo Hernández de Cos, general manager of the Bank for International Settlements.

For his part, Powell gave an unprecedented statement against Trump, saying the threat of charges boils down to the fact the Fed did not lower interest rates as much or as quickly as the President would have liked.

"This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress's oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts," Powell said.

"The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President."

The timing coincides with US inflation data, which was released overnight, showing headline inflation rose by 0.3% in December, with the all-items annual rate holding at 2.7%, in line with forecasts and a strong indicator that keeping interest rates at restrictive levels has been helping to fight against sticky inflation.

The testimony was related, in part, to a multi-year project to renovate historic Federal Reserve office buildings. However, Powell gave a scathing statement, saying the action is less about his statement, and more an act of political pressure and intimidation from US President Donald Trump's administration.

"I have deep respect for the rule of law and for accountability in our democracy. No one - certainly not the chair of the Federal Reserve - is above the law. But this unprecedented action should be seen in the broader context of the administration's threats and ongoing pressure," Powell said.

"This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress's oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts.

"The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President."

Powell said the action threatens the Fed's independence to be able to set interest rates based on evidence and economic conditions.

"I have served at the Federal Reserve under four administrations, Republicans and Democrats alike. In every case, I have carried out my duties without political fear or favour, focused solely on our mandate of price stability and maximum employment," he said.

"Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do, with integrity and a commitment to serving the American people."

Betashares chief economist David Bassanese said the move from Trump appears to be a "last-ditch effort" to pressure Powell to not only end his term as chair in May, but also to step down concurrently from the FOMC, despite that term not expiring until January 2028.

"Trump is playing with fire in his repeated attempts to pressure the Fed into cutting rates," Bassanese said.

"While it makes for political theatre and once again highlights the President's desire to wield wide ranging powers, it risks backfiring if it undermines market confidence in the independence of the US Federal Reserve and pushes long-term bond yields higher.

"After all, in the US it is long term rates - not the Fed's control over short-term rates - that determine mortgage rates and most corporate borrowing costs. Rumours that President Trump may nominate his economic adviser, Kevin Hassett, as the next Fed chair will do little to reassure markets about the Fed's independence."

The US 10-year Treasury yield rose by one point to 4.19% and the US 2-year Treasury yield was steady near 3.54% after the threat of indictment was announced.

deVere Group chief executive Nigel Green said global markets recognise this issue is greater than a simple policy disagreement.

"Pressure on the central bank of the world's largest economy carries global consequences," Green said.

"Confidence in monetary governance in the United States anchors financial stability far beyond its borders. When that confidence weakens, capital moves quickly toward assets designed to exist beyond political reach."

Green said the Fed's role reaches far beyond US borders, saying its decisions shape global interest-rate cycles, capital flows, currency stability and risk pricing across continents, influencing trading desks, treasury teams, and policymakers across emerging markets.

"Monetary credibility in the US sets the tone for financial credibility everywhere," Green said.

"Financial systems operate on trust in institutions. The Fed anchors that trust for the dollar, for global bond markets, for equity valuations and for cross-border investment flows.

"When legal pressure appears alongside political frustration over interest rates, investors reassess the durability of that anchor."

According to the United Nations' (UN) latest World Economic Situation and Prospects 2026 report, inflation will rise by 3% in 2026 despite a slight improvement in Australia's economy.

The report pointed to the easing of monetary policies and "expansionary" fiscal measures in Australia, which have stabilised the rebound of its economy amid heightened uncertainty and persistent global trade tensions, including the US tariffs.

However, inflation has increased in recent months, as reflected in the Australian Bureau of Statistics (ABS) data published earlier this month, which revealed that the CPI rose 3.4% in the 12 months to November 2025.

Although it was a decline from October's figure, the latest figure is likely to push the Reserve Bank of Australia (RBA) to hold or hike the interest rate.

Specifically, the report said the inflation surge stemmed from a combination of global supply- and demand-side disturbances, including abrupt shifts in consumption patterns during the pandemic, widespread supply-chain bottlenecks and sharp increases in energy and food prices.

"The extent to which these global shocks were translated into domestic price pressures depended on country-specific factors such as exchange rate regimes, fiscal responses, labour market tightness and market structures, highlighting the importance of domestic vulnerabilities and policy settings in shaping inflation outcomes and persistence," the report highlighted.

Notably, the report indicated that Australia may have overcome the worst of the US President Donald Trump's tariff war.

As at the end of October 2025, the estimated average effective tariff rate, based on 2024 trade data, reached 8.9% for Australia, reflecting a low International Emergency Economic Powers Act (IEEPA) reciprocal tariff baseline rate of 10%, the report said.

Meanwhile, the effective tariff rate for Japan was 14.7%, and for South Korea, 14.5%, reflecting the reduction of the IEEPA reciprocal tariff baseline rate applied to imports from both countries from 25% to 15%.

Despite that, Australia's gross domestic product (GDP) was measured at 1.8% in 2025, sitting just behind the US (1.9%), but ahead of other developed economies such as Canada (1.4%), Japan (1.2%), South Korea (1.1%), and New Zealand (0.7%).

Australia's GDP is also likely to increase to 2.2% this year, the highest estimate out of the aforementioned markets.

However, Commonwealth Bank head of foreign exchange, international and geoeconomics Joseph Capurso said there could be more growth in the US than the UN is predicting.

"We are more optimistic about the US economy in 2026 because of tech spending," he said.

"We forecast US economic growth to pick up to 2.4% in 2026 compared to the UN's forecast of 2%."

"The 3.4% annual CPI inflation to November was down from 3.8% to October," ABS head of prices statistics Michelle Marquardt said.

The largest contributor to annual inflation in November was housing, up 5.2%. This was followed by food and non-alcoholic beverages, up 3.3%, and transport, which rose 2.7%.

VanEck deputy of investments and capital markets Jamie Hannah said it was pleasing to see inflation pull back in November.

"After a steady climb over the second half of last year, it changed course in November, with headline inflation dropping to 3.4%, and trimmed mean - the RBA's preferred measure of inflation - coming in at 3.2%," Hannah said.

"Had inflation continued to move north, this could have sealed the deal for a rate hike next month, which would be the first increase in more than two years. As it stands, the positive developments from today's inflation print could be enough to keep the rate hike wolves at bay for now, but the outlook over 2026 is far from certain."

Hannah said after three rate cuts last year, the best-case scenario is for the Reserve Bank of Australia (RBA) to keep rates on hold, but there are still expectations of a hike on the table.

"Inflation remains elevated, and between government energy rebates rolling off, higher tariffs flowing through to consumer prices, and geopolitical conflicts impacting major supply chains - not to mention the stickiness of services and housing inflation - keeping it on a tight leash this year will not be straightforward," Hannah said.

Deloitte Access Economics partner Stephen Smith said given the CPI read, the RBA now has an important decision to make.

"The RBA will remain on high alert for the next few months. In Deloitte Access Economics' view, an increase in the cash rate in February would be premature for several reasons," Smith said.

"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."

Smith said it would be more prudent for the RBA to wait and watch developments in the labour market before making a move to the cash rate.

"Australia's economic challenges continue to be dominated by supply rather than demand. Poor productivity growth and weak investment are not the result of a cyclical downswing, but instead are the structural consequences of a lack of economic reform over the past quarter of a century," he said.

"If the RBA feels it has no choice to hike rates, then it is a sad indictment on the failure of policymakers to address the root causes through reform."

Commonwealth Bank economist Ashwin Clarke said the bank has revised its forecasts, now expecting a 25 basis point cash rate rise in February.

"Australia has ended 2025 in a cyclical upswing. While growth has improved, progress on inflation has stalled," Clarke said.

"We expect GDP growth to pick up a little further over the next six months, from 2.1%/yr in Q3 25 to peak at 2.4%/yr in Q1 26 before settling down to 2.2% by end 2026. With growth above capacity and a resilient consumer, we expect inflation to show signs of persistence.

"As a result, we now expect the RBA will hike the cash rate by 25bp in February to ensure inflation is returned to the mid-point of the target band by the end of 2027."

Despite expecting a rate hike to kick off the year, Clarke said the bank doesn't expect a large hiking cycle, saying the RBA would be "fine tuning".

CBA expects the cash rate to sit at 3.85% at the end of 2026.

"The risk sits with a larger hiking cycle if growth has more momentum and inflation more persistence than we predict," Clarke said.

IG market analyst Tony Sycamore agreed a February hike is on the table.

"The [RBA] board will continue to prioritise the more established quarterly CPI for gauging underlying momentum, with December-quarter data due ahead of the February 3 meeting," Sycamore said.

"The RBA forecasts trimmed-mean inflation to rise 0.8% QoQ in Q4. A print at or below this level would likely keep the cash rate steady at 3.6%, while a reading of 1% or higher could trigger a 25bp hike in February."

However, not all experts agree. Betashares chief economist David Bassanese said there is still a possibility the RBA will cut interest rates this year.

"Critical to the outlook... is whether inflation can moderate without the need for more monetary restraint and slower economic growth," he said.

"On the expectation that inflation will moderate from the strong pace evident in the September quarter, the RBA is expected to leave interest rates steady in the first half of 2026, with two rate cuts still expected, albeit delayed to August and November."

"Australia's productivity growth has stalled since 2016. We need to get productivity moving to ensure future generations can live better and more prosperous lives than those that came before them," Productivity Commission chair Danielle Wood said.

"Our final suite of recommendations, if fully implemented, would add billions to the economy, benefiting workers, households and businesses today and into the future.

"No single policy reform can bring productivity growth back to its long-term average - governments will have to make a lot of pro-productivity decisions that support and reinforce each other."

The five pillars were creating a more dynamic and resilient economy; building a skilled and adaptable workforce; harnessing data and digital technologies; delivering quality care more efficiently; and investing in cheaper, cleaner energy and the net zero transformation.

To create a more dynamic and resilient economy, the PC focused on current tax setting and regulatory burdens.

"Reforming our company tax system and reducing the burden of regulation are two of the best ways to inject more dynamism and investment into our economy," PC deputy chair Alex Robson said.

The report recommended moving to a hybrid corporate tax system, combining a lower company income tax of 20% for small and medium businesses earning up to $1 billion, and a tax rate of 28% for larger firms, with a net cashflow tax of 5% for all companies.

The PC suggested this reformed tax system would increase GDP by just over $13 billion (0.7%).

"Having modelled and refined this proposal further since our interim report, we are confident it is the best revenue-neutral option for improving investment," Robson said.

"We have also modelled and explored alternative corporate tax reforms that would boost investment but come at a cost to the budget if not paired with other revenue measures."

The report also recommends the government make regulatory reform a key priority with an ambitious whole of government agenda, including major reforms targeting a $10 billion reduction in regulatory burden.

"Poorly designed or implemented regulation is a handbrake on growth. We need regulatory policy that better balances the benefits and trade-offs when considering new regulation," Robson said.

On building a skilled and adaptable workforce, Robson said the government should help build solid foundational skills, smooth pathways to upskilling and make it easier for workers to enter new occupations.

The report recommends measures like improving access to high-quality teaching resources (instructional materials, edtech and professional development), which would both support teachers and ensure more students receive high-quality teaching.

It also recommends actions to make it easier for students and workers to access learning and build their skills over time, and replacing excessive occupational entry regulations with more efficient alternatives.

Harnessing data and digital technologies

The report on harnessing data and digital technologies recommends an approach to regulating AI based on finding and fixing gaps in current regulations that would help make the most of what is potentially an $116 billion productivity opportunity over the next decade.

It also recommends reforms that would help people access and share data that relates to them.

"New ideas are the most important driver of productivity growth. Our policy settings should foster innovation and spread it across the economy," Robson said.

On delivering quality care, the PC recommends greater investment in prevention and early intervention.

It suggested that investing $1.5 billion over the first five years of a proposed National Prevention Investment Framework could return savings to government of around $2.7 billion 10 years after the initial investment.

"Governments can lift productivity by breaking through the siloed approach to decision-making in the care economy and improving the quality and efficiency of the services it provides," Wood said.

Lastly, recommendations for investing in cheaper, cleaner energy and the net zero transformation included introducing a national emissions-reduction policy for the electricity sector.

It said taking a technology- and jurisdiction-neutral approach to the location of new generation and storage infrastructure in the National Electricity Market could save around $8 billion over the next 15 years, without compromising the achievement of state renewable energy targets.

"Achieving net zero at least cost and adapting to the effects of climate change are central to our productivity challenge," Wood said.

Chalmers said the Budget update will be about "delivery, responsibility and restraint".

"We will deliver on our promises, make room for big pressures on the Budget, and update our forecasts," Chalmers said.

Chalmers said the mid-year budget update will include $20 billion in additional savings and reprioritisations to improve the budget bottom line.

In addition to expected cost cutting, Chalmers flagged that the government will be spending more money to assist veterans and older Australians.

"The figures we release on Wednesday will show... an extra $3 billion more in support for seniors on the Age Pension, an extra $2.1 billion more for military superannuation schemes, an extra $2 billion for veterans, and more," Chalmers said.

"We take our responsibilities to veterans and older Australians very seriously and we'll always make room in the budget to do the right thing by people and that's what we've done in the mid-year update."

Treasury will also update its economic forecasts in the mid-year update. Chalmers said it will confirm the economy is likely to continue to gather momentum.

"An important feature of this is the private sector recovery that we've been planning for and preparing for, which is really starting to take shape," he said.

"The mid-year update forecasts a further pick up in business investment off the back of big increases in private sector spending on new technology and renewable energy.

"Updated estimates for business investment will show the forecast in 2025-26 has doubled to 3%. That's very good for our economy and our Budget."

Chalmers said new business investment has grown by an annualised average of 3.9% and productivity has grown for four consecutive quarters.

"While there's more to do to make our economy more productive and deal with the challenges coming at us, the mid-year update will highlight Australia's enviable combination of low unemployment, high participation, real wages growth and an economy and private sector that are strengthening," Chalmers said.

"Responsible economic management is a defining feature of the Albanese government, and it will be a defining feature of the mid-year Budget update this week as well."

Speaking to Financial Standard, policy changes coming out of the US, sticky inflation and how the artificial intelligence (AI) boom progresses will be the major themes to watch, they've said.

GSFM investment strategy advisor Stephen Miller said many of the same themes that played out in 2025 will continue to impact markets in 2026.

"The questions that are front of mind when we go into 2026 aren't that different from what the questions were front of mind as we went into 2025," Miller said.

"A persistent theme in 2025 was the impact of US President Donald Trump's trade measures. Markets were worried about elevated geopolitical risk.

"Markets were also worried that inflation would be sticky, and that has turned out to be quite true and bond yields have stayed quite high."

Miller said geopolitical concerns, as well as higher inflation, are two issues which will continue into the new year, along with growing investment into AI.

He said tech stocks showed more resilience than markets may have anticipated at the beginning of the year, and investors will be watching to see if an AI bubble forms or continues from strength to strength.

"It's a bit like asking, 'how long is a piece of string?' How persistent can these structural mega themes continue to be in driving equity market performance? That's the big debate I think we're going to have through 2026," Miller said.

Schroders head of multi-asset and fixed income Sebastian Mullins said questions over the possibility of an AI bubble will persist, but it seems - for now - a bubble is not likely.

"The cases for [a bubble] is very special valuations, a handful of companies, a high concentration risk in those companies, a circle of financing going around, media, FOMO, all that says 'bubble'," Mullins said.

"But valuations, while stretched, are not absolutely insane. We had worse PE ratios in 2020 and 2021, after COVID. So, yes, getting expensive, but not crazy.

"Concentration risk is true, but... these are highly profitable companies. But we've seen debt enter the game this year. So, that's the start of the worrying phase."

In terms of policy settings coming from Trump, Betashares chief economist David Bassanese said while geopolitical risks remain, trade concerns are less likely to have an impact on markets.

"I don't think tariffs are going to be posed as much risk in 2026 as they did at least in the first half of 2025. [That trade would be used] as a weapon to be used seems to be diminishing," Bassanese said.

Looking specifically at Australia, Bassanese said the major question in the economy is whether the nation has hit capacity constraints.

"Can we allow the economy to continue to grow at trend or more pace, or does the Reserve Bank of Australia have to rein in growth through higher interest rates? Ultimately, I guess my base case view is that I think the inflation will moderate. My base case, the RBA won't need to raise interest rates," Bassanese said.

"I think Australia will continue to enjoy a sort of Goldilocks period for the year ahead, but I do acknowledge that there's a risk that if the next couple of quarterly CPI figures shows underlying inflation still running at an annualised pace greater than 3%, they're probably going to raise rates in February. So that's very near-term risk for markets."

Citi economists have changed their outlook from an assumption the RBA would remain on hold to anticipating a rate hike as early as February.

"We believe a tight labour market, new (higher) inflation forecasts, strong housing and household consumption all point to monetary policy being too accommodative," Citi economist Faraz Syed.

"Therefore, we shift our no policy change view to 50 basis points worth of rate hikes in 2026, starting as early as February, followed by May."

However, not all economists agree a hike would come so soon.

KPMG chief economist Brendan Rynne said despite unemployment remaining steady at 4.3%, it is too soon to tell what the RBA will do.

"Total employment fell by 21,300 between October and November, well off the market consensus expectation of +20,000 new jobs.  However, around 23,000 people withdrew from the labour force over same period, resulting in the unemployment rate being maintained at 4.3% for November," Rynne said.

"What is more concerning is that the annualised rate of employment growth across the economy is now less than 1.3%, well down from the 3% annual rate of employment growth the Australian economy started the year off with.

"The RBA had forecast labour market outcomes similar to what the results are showing us today, but they will still cause pause for thought for the board in terms of how best to set monetary policy in the new year with a labour market that is clearly weakening and an inflationary environment that has seemingly more strength to it than previously anticipated."

Bendigo Bank chief economist David Robertson believes a February hike is still off the cards, and the more likely scenario is the central bank will remain on hold for most of the year.

"The market has quickly moved from pricing in one more rate cut in 2026 to now pricing in two hikes," Robertson said.

"While the possibility that the easing cycle is over is clearly much more likely after recent inflation data, the proposition that the RBA may need to hike rates early next year does seem very premature."

Robertson said the most likely outcome now for the cash rate in 2026 is no change at all, like 2024, but there is still a chance of movement in either direction after the RBA reconvenes in February.

"If the RBA do need to adjust rates next year, I'd suggest a cut is still as likely as a hike," he said.

Chalmers said the private sector is taking over from the public sector as the key driver of growth in Australia.

"Since we came to office, business investment has grown by an annualised average of 3.9%. It went backwards on average by 1.3% each year under our predecessors, but we've helped turn that around," Chalmers said.

"In the most recent quarter, new business investment grew at the fastest pace in almost half a decade and was the primary driver of growth in the quarter, driven by a surge of investment in technology. It's a similar story for housing."

Chalmers said while there is "no shortage of challenges" in the Australian economy, the private sector recovery "so conspicuous" in the national accounts means the nation can confront global volatility and persistent price pressures from a position of "genuine economic strength".

"Private demand drove all of the growth in our economy over the past year. The private sector recovery we've been planning for and preparing for is gathering pace," he said.

"In just a year, annual private demand growth has lifted more than five-fold, while at the same time, annual public demand growth is less than a third of what it was a year ago.

"This momentum is welcome, it's deliberate, and it's the foundation for what comes next."

Chalmers patted himself and the government on the back, saying the focus on rebuilding productivity growth has helped strengthen investment and helped deliver a stronger economy.

"We legislated the new environmental laws, agreed new competition reforms with the states and released our artificial intelligence plan. That's more reform in five days than our predecessors managed in the five years before COVID," Chalmers said.

Chalmers added that the government is still working with regulators to facilitate a deep dive into financial sector regulation, including prioritising the streamlining and harmonisation of data collection.

"Dealing with inflation in the near term and building productivity in the longer term are our primary goals but key to that are our efforts to make our economy more resilient and our budget more sustainable," he said.

"The story of 2025 has been the welcome return of the private economy. The government's reform agenda is all about building on that momentum.

"This will be the central focus of the Budget next year and the consensus and directions established at the Reform Roundtable will be the key influence on our thinking."

The Executive Opinion Survey, conducted in partnership with Zurich and Marsh, gathers the views of more than 11,000 business leaders from over 116 G20 member nations on the top five most significant threats to their countries over the next two years.

Economic downturns, such as recessions and stagnation, remain the most significant concern for all members, including Australia.

The biggest risks for Australia also include disruptions to a systemically important supply chain (second) and critical infrastructure (third). They are followed by adverse outcomes of frontier technologies (quantum, biotech, geoengineering) at fourth place, and by the decline in health and wellbeing at fifth place.

Compared with the G20 average, after economic downturn, insufficient public services and social protections ranked second, followed by the lack of unemployment (third), inflation (fourth), and misinformation and disinformation (fifth).

Technological threats associated with misinformation and disinformation have risen to become a top threat for the first time, reflecting fears that advances in artificial intelligence (AI) are fuelling information warfare amid rising geopolitical tensions, influencing elections and global markets, and threatening critical infrastructure and cybersecurity, Zurich said.

Notably, extreme weather events, which were ranked as the fifth biggest risk by G20 leaders in 2024, did not feature in this year's top five risks.

Commenting on the findings, Zurich chief risk officer, Australia and New Zealand David Wainwright said the survey demonstrates the universality of some risks, including those related to economic downturns but as well as the nuanced considerations for each region.

"The findings also demonstrate a striking shift in the domains driving risk and shaping business decisions. Whilst economic downturn has remained a consistent consideration both globally and in Australia, concerns around technology and health have become increasingly dominant, and the prominence of climate change and environmental risk perceptions has decreased," Wainwright said.

"As one of Australia's largest life insurers, the emergence of declining health and wellbeing as a new key concern in the survey is both alarming and unsurprising given some of the trends we have been witnessing in our own claims data and analysis.

"This issue highlights the importance of resilience and prevention as a continued area of focus for our industry."

Meanwhile, Marsh Specialty president Andrew George highlighted that the rise of AI can exacerbate misinformation and disinformation for bad actors to operate more broadly.

"As such, the challenges posed by the rapid adoption of AI and associated cyber threats now top boardroom agendas," Martin said.

"Also, while economic and geopolitical factors have deflected some of the focus on change commitments in the short-term, businesses must remain focused on their environmental objectives to mitigate the risks associated with the changing climate in the longer-term."

The largest contributors to annual inflation were housing (+5.9%), clothing and footwear (5.4%), education (5.4%), food and non-alcoholic beverages (+3.2%), and recreation and culture activities (+3.2%).

Electricity costs rose 37.1% over the 12 months, with the annual rise primarily driven by state government rebates being used up by households, as well as the timing of the rollout of the Commonwealth Energy Bill Relief Fund (EBRF) rebates.

"In October last year, State Government electricity rebates were in place for Queensland and Western Australia. Over the year, those rebates have been used up and those programs have ended meaning electricity costs rose over the year," the ABS said.

"The timing of when households first received payments, and subsequent catchup payments, of the 2024-25 EBRF and EBRF 2025 Extension payments, also contributed to the annual rise in electricity costs."

Excluding the impact of the various changes in Commonwealth and state electricity rebates, electricity prices rose 5%.

In the month of October, though, inflation was flat (0.0%) in original terms but rose 0.3% in seasonally adjusted terms.

Deloitte Access Economics partner Stephen Smith said today's figures confirm that a rate cut is off the table for the next few months.

Inflation pressures in the economy have accelerated in the recent past, he explained, noting that the latest data shows, on an annualised basis, trimmed mean inflation was running at more than 4% in October and at more than 3.5% annualised over the past three months.

"Monthly headline inflation surprised on the upside, despite electricity prices falling 10.2% in October alone," Smith said.

"This result follows September quarter inflation figures that came in higher than expected, while the unemployment rate remains low. Throw this inflation print on the pile and it is clear that the RBA cannot justify cutting rates right now."

The RBA kept interest rates on hold at the November 5 meeting at 3.6%.

VanEck head of investments and capital markets Russel Chesler commented that rising inflation is something to keep an eye on, given the RBA's revised projections of an elevated inflation environment throughout 2026.

"However, barring a sharp spike in either inflation or unemployment - neither of which we have seen in recent years - we think it will continue to be business as usual for Australians. What we've recently seen throughout the 'higher for longer' tightening cycle and cost-of-living crisis is that the Australian economy is remarkably resilient," Chesler said.

"Inflation has declined significantly, the labor market is still strong, and private demand is recovering. The economy is gaining momentum, with growth forecast at 1.8% in 2025 and 2.1% in 2026," the IMF said.

"However, global developments including elevated trade tensions, along with uncertainty around the momentum in private consumption and labor market conditions, pose risks to growth and inflation."

The IMF said boosting Australia's growth prospects requires continued efforts to tackle fiscal and structural challenges.

"Comprehensive tax reform and greater spending efficiency can maintain fiscal sustainability, enhance economic resilience, and boost productivity," it said.

"Driving durable productivity growth also requires careful prioritizing and bundling of reforms around technology, competition, labor markets, and the green transition."

Treasurer Jim Chalmers said overall the assessment was positive for the outlook for the economy.

"Under Labor, inflation is around a third of its peak, debt is down, real wages are growing, unemployment is low, we've overseen the creation of more than 1.2 million jobs and interest rates have already fallen three times this year," Chalmers said.

"This is the soft landing we have been planning for, preparing for and hoping for."

Chalmers said the nation has made "remarkable progress" in the economy, but added there is more work to do.

"We know the best way to build on all the progress we've made is to make our economy more resilient and more productive," he said.

"The statement acknowledges the government's ambitious agenda across productivity, dynamism and competition.

"The authorities are implementing a series of reforms to modernise competition policy to better support business dynamism, innovation, and investment."

Chalmers also noted that the IMF said the net zero transformation is a golden opportunity for investment and productivity in Australia.

"We've made substantial progress on productivity reform since our roundtable in August, across housing, environmental approvals, better regulation, artificial intelligence, and simplifying trade, with more underway," Chalmers said.

"We know the job is far from over because people are still under pressure. That's why our economic plan is all about helping with the cost of living at the same time as we modernise Australia's economy to boost living standards.

"The best defence against global volatility and the best way to lift wages and living standards over the long term is with a more productive and resilient economy and a stronger budget, and that's our focus."

While board members noted the central projection was for the economy to remain broadly in balance, and consistent with the board's objectives, there were "significant uncertainties" on both sides of its baseline projection.

"Given that, members determined that they could afford to be patient while assessing what the incoming data reveal about their judgements on the extent of spare capacity, the outlook for the labour market and the degree of restrictiveness of monetary policy," the minutes said.

The RBA said members discussed developments that could materially influence their decisions at future meetings, noting that those decisions would be driven by how incoming data may alter the outlook for the economy.

Board members said if incoming data signalled the emerging recovery in demand was stronger than expected, further supporting employment growth, they would be more willing to keep the cash rate on hold.

"Members noted that such a scenario could emerge in several ways, including if global growth continued to be more resilient than forecast or if the strengthening in household income and wealth, combined with easier monetary policy than a year earlier, resulted in a larger-than-expected recovery in household spending," the minutes said.

"Another factor was if the incoming data caused the board to lower its judgement about the supply capacity of the economy.

"Members observed that this could happen if inflation remained high over coming months or if productivity growth proved to be weaker than expected."

Members also said if the board changed its assessment that monetary policy was still slightly restrictive, it would also be more inclined to leave the official cash rate where it currently stands at 3.6%.

"Members noted that any of these scenarios could limit the scope for further monetary easing, particularly with inflation having been above its target for much of the preceding few years," it said.

However, should the labour market weaken materially, it would be inclined to cut interest rates.

"Members observed that many indicators of the labour market had softened over the prior year. They noted the risk that employment growth in the market sector remains soft, which could occur if the uncertain economic outlook reduces firms' willingness to hire or if an emerging focus on cost-cutting results in layoffs," the minutes said.

"Alternatively, members noted that the recovery in GDP growth could prove to be weaker than expected if households are more cautious about spending than had been assumed.

"In both scenarios, excess capacity was likely to emerge and dampen inflationary pressures. If so, it would likely be appropriate to ease monetary policy to keep inflation at target and the labour market around full employment."

Board members agreed it was "not yet possible to be confident" about which scenario was more likely, which is why interest rates were left on hold in November.

The board said it remains "cautious and data dependent" as the end of the year approaches.

"Members committed to continue paying close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market," it said.

"The board will remain focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome."