According to Deloitte Access Economics partner Stephen Smith, January’s inflation data indicates that a pre-budget interest rate rise is still a possibility. This makes May a crucial month for assessing the state of the economy. Smith stated that without substantial economic and tax reforms outlined in the upcoming federal budget, Australia risks prolonged stagnation and persistent inflation. The latest inflation figures were significantly impacted by the conclusion of energy bill relief measures, which led to an 18.5 per cent increase in electricity prices during January alone.
Smith anticipates that the Reserve Bank of Australia (RBA) will likely maintain its cautious stance and continue to monitor labour market trends, national accounts, and inflation data over the coming months. This cautious approach aligns with the delicately balanced economic outlook for 2026. He noted that consumer spending and business investment had been showing signs of improvement and were expected to drive a gradual economic recovery this year. However, the recent rate hike is expected to dampen this recovery, potentially leading to another year of moderate economic growth.
Smith believes that while immediate action from the RBA is unlikely, the May meeting will be critical. This is because it will allow the RBA to evaluate the full March quarter data and assess the overall health of the economy. He emphasised the importance of the May budget in addressing the current economic challenges through significant reforms.
Smith concludes that as living standards decline and the RBA struggles with sluggish supply growth, fiscal policy becomes the key to accelerating economic growth and bringing inflation back within the target range. Deloitte Access Economics provides economic analysis and forecasting to businesses and governments, helping them make informed decisions. Deloitte is a global professional services network providing audit, tax, consulting, and financial advisory services.
