The global economy is holding firm despite mounting uncertainty, says economists.
That's welcome news for Australia, which has been largely insulated from geopolitical shocks and is now seeing modest growth. But that resilience also keeps the prospect of further interest rate hikes in play.
"The most interesting feature is how resilient the global economy has remained through last year," Paul Bloxham, chief economist at HSBC for Australia and New Zealand, said in a webinar hosted by the Mortgage and Finance Association of Australia (MFAA) and attended by Australian Broker.
"There was pretty reasonable growth across the world," he explained, despite the threat of tariffs and political unrest in the Middle East. "And we're expecting reasonable resilience as we look into 2026, as well.
"The global economy has not been a particularly large driving force for Australia," Bloxham continued. "There wasn't a lot of downside that came through to the Australian economy. The local story has actually been driven by domestic development; it's been primarily a domestic story. Now, we're in a modest growth upswing."
National Australia Bank (NAB) has forecasted Australia’s real GDP to grow around 2% in 2026. If inflation remains stubborn alongside that expansion, the case for further interest rate hikes strengthens. For now, price pressures show little sign of easing.
January's headline CPI print was 3.8%, the same as December, while trimmed mean inflation edged up to 3.4%, from 3.3% the month earlier. Both metrics are above the Reserve Bank of Australia's (RBA) target inflationary range of 2% to 3%. The central bank has made clear it will not ease monetary policy again until inflation is back within that range.
After delivering three interest rate cuts in 2025, the RBA changed tack earlier this month, raising the official cash rate (OCR) by 25 basis points to 3.85%. The move rattled mortgage holders and borrowers, but caught few off guard.
Attention has now shifted to 2026, where market players are increasingly pricing in at least one more rate hike, likely during the RBA's May meeting.
Bloxham is among the economists who believe the RBA will raise rates again.
"That means households face higher mortgage rates and that cuts into how much spending they can do, and it will slow down the consumer," he said. "And, of course, it means we get some sort of cooling in the housing market."
On Friday, ANZ reversed course. After forecasting the RBA will likely hold rates steady for the remainder of the year, the major bank is now expecting an increase of 25 basis points during the May meeting.
"With a series of upward inflation shocks over recent quarters and less deceleration in the January trimmed mean than we expected, we now see this as the most likely path of policy," Adam Boyton, head of Australian economics at ANZ, co-authored in a report.
In terms of the housing market, Bloxham added: "We think house price growth will slow down this year. We don't think house prices will fall outright. And that's a lot to do with the fact that the housing market is still, fairly, heavily under supplied. That's one of the things that we think will prevent house prices from falling outright.
"But we do think we will see some sort of a slowdown in housing prices," he continued. "Just as we expect there will be a slowdown in the economy. Because higher interest rates work that way."
The RBA meets next on 16 and 17 of March.
