Economic recovery for A/NZ as markets look to interest rate increases

Cautious optimism describes the economic outlook for 2026.

The effect of earlier interest rate cuts, a stable outlook for growth in major trading partners and a lift in business investment are emerging as the key drivers of this optimism. Inflation remains a point of contention, with the recent spike creating concerns in markets that higher interest rates will be needed, perhaps in the short term, to bring it back under control.

The interest rate cutting cycle globally is at or near an end, with the possible exception of the US where interest rate cuts are in play for 2026. Having cut aggressively over the past 18 to 24 months, other major central banks are waiting for the effects of easier policy to kick into renew economic activity.

Australia

Signs of stronger economic activity have been tempered by mixed news on the labour market, on going consumer pessimism and heightened geo-political issues.

Inflation kicked higher over the second half of 2025, with the RBA preferred trimmed mean measure holding around 3.25 per cent, which is materially above the 2.5 per cent mid-point of the RBA target. There remain several ‘quirks’ in the inflation data that are forcing it higher – the ending of electricity rebates for example – which the RBA will downplay when assessing the monetary policy outlook.

The upside momentum in the economy has been most evident in household spending and dwelling construction, both of which are recording growth at 3 year highs. There are encouraging signs of a long overdue recovery in private sector business investment which is vital to boost productivity. Growth in government demand is slowing as some key public sector projects are at or near completion.

The net effect of these trends points to solid, but not spectacular, GDP growth around 2.5 per cent in 2026.

Despite this encouraging news, the labour market remains mixed.  Even with the stronger data for December, annual growth in employment growth slowed to 1 per cent through 2025 from 2.5 per cent in 2024 and 3 per cent in 2023. This is the slowest pace of job creation since 2016 (outside the pandemic). Job vacancies continue to decline and wages growth is moderate. In the past half year, the unemployment rate has been between 4.1 and 4.4 per cent, which contrasts with the 2022 low of 3.4 per cent and a rate of 4 per cent at the start of 2025.

House prices are continuing to rise, although supply, demand and labour market drivers are seeing the pace of increase moderate.

After three interest rate cuts between February and August 2025, the RBA has held the official cash rate at 3.60 per cent for six months as it judges the dynamics of economic growth, inflation, the labour market and global issues. That said, the market is pricing in a moderate tightening cycle in to 2027, with two 25 basis point hikes priced in over the next 12 to 18 months.

New Zealand

With 325 basis points of interest rate cuts in the current cycle and the official rate at a low 2.25 per cent, there are signs that the economy is recovering from the recession that pushed the unemployment rate to a nine year high of 5.3 per cent.

Retail sales rose a strong 1.9 per cent in the September quarter with rising consumer confidence and the cash flow effect of lower interest rates impacting positively. Having fallen around 25 per cent from the 2022 peak, house prices have stabilised which is helping to lift confidence.

Inflation edged up to 3.1 per cent in the December quarter as price increases in travel, utilities and petrol impacted. Inflation is above the RBNZ target of 1 to 3 per cent. The signs of an economic pick up in addition to the inflation risks has seen markets starting to price in interest rate increases in 2026 and 2027, although the relatively high unemployment rate will act against an early tightening.

Currencies

The sharp depreciation of the USD linked to structural economic and policy problems in the US has seen the AUD hit multi-year highs around 70 US cents. The AUD has also risen on most cross rates including against the EUR. The AUD is benefiting from confidence about the economic pick up and a resurgence in commodity prices.

While the NZD has benefited marginally from the USD weakness, to be trading around 60 US cents, it has fallen to 1.16 against the AUD. The still problematic nature of the economic recovery in New Zealand is holding back the NZD gains.

Stephen will be delivering an exclusive, informative and always entertaining 2026 CFO Economic Outlook at the upcoming CFO Magazine A/NZ Melbourne CFO Symposium on Thursday 19th February 2026 & also Brisbane CFO Symposium on Tuesday 12th May 2026 >

For full details or to register, visit: www.VICCFOSymposium.com or www.QLDCFOSymposium.com