Statement on Monetary Policy – February 2026Overview

Australian economic growth and inflation have both been stronger than expected compared with six months ago. The recent pick-up in inflation has been broadly based and our assessment is that some of the increase in inflation has been driven by capacity constraints that are proving greater than previously anticipated.

Overall, the economy seems to be further from balance than had been assessed last year. Labour market conditions have been broadly steady in recent months and remain a little tight. The inflation outlook has been revised materially higher and inflation is expected to remain above target for some time. Given this, the Monetary Policy Board judged that it was appropriate to increase the cash rate target to 3.85 per cent.

Underlying inflation is higher than expected.

Underlying inflation rose to 3.4 per cent over the year to the December quarter, which was higher than expected three months ago and substantially higher than expected in the August Statement. The pick-up in inflation over the second half of 2025 was observed across a broad range of categories, including for services, retail goods and the cost of building new homes.

Headline inflation increased to 3.6 per cent over the year to the December quarter, which was also stronger than expected in the November Statement. In addition to the pick-up in underlying inflation, the outcome reflected higher inflation for some volatile items such as fuel and travel. The expiry of state electricity rebate schemes contributed around 0.5 percentage points to headline inflation over the past year.

GDP growth has continued to pick up, with private demand growth surprisingly strong.

GDP grew by 2.1 per cent over the year to the September quarter, which was around our estimate of the economy’s potential growth rate. More recent data suggest that growth picked up further in the December quarter. In particular, growth in private demand looks to have been especially strong in the second half of 2025.

Household consumption grew solidly in the September quarter and timely indicators of household spending suggest that consumption growth continued to pick up during the December quarter and by much more than expected in the November Statement. Growth in dwelling investment has also been stronger than expected, consistent with the broader strength in housing market conditions and a recent increase in capacity pressures in the construction sector. However, some of the recent strength in business investment, which can be lumpy and have a high imported component, is expected to be temporary.

Labour market conditions have been stable.

The unemployment rate has been broadly stable at around 4¼ per cent in recent quarters, and the December quarter outcome was lower than anticipated in the November Statement. Other measures of labour underutilisation, such as the hours-based underutilisation rate, have been little changed.

Many of the indicators used to assess where the labour market stands relative to full employment suggest that labour market conditions remain a little tight. The underemployment rate remains low and firms continue to report difficulty finding suitable workers. Growth in unit labour costs remains elevated.

Overall, capacity pressures in the Australian economy are judged to be greater than previously anticipated. This judgement reflects the strength and breadth of the recent increase in inflation, together with evidence from other indicators, including unit labour cost growth, survey measures of capacity utilisation and a range of other labour market indicators. Recent strength in consumption and investment growth has likely intensified capacity pressures and could continue to do so, to the extent it persists. Taken together, forward-looking indicators of the labour market, along with the recent strength in domestic economic activity, point to labour market conditions remaining a little tight in the near term.

Australian financial conditions eased over 2025, and in light of ongoing strength in activity and inflation, market participants expect the cash rate to increase this year.

Overall, financial conditions eased during 2025 alongside the reductions to the cash rate, with lending rates declining and credit growth picking up noticeably. There is uncertainty about whether financial conditions remain restrictive overall, with mixed signals across indicators. Market participants’ expectations for the future cash rate have shifted up further since the November meeting, with expectations for at least two hikes over the forecast period. The Australian dollar has also appreciated against the US dollar and on a trade-weighted basis since the November Statement.

Global economic activity has proven resilient.

Global economic growth in the second half of 2025 was more resilient to developments in trade policy than anticipated. Economic growth in Australia’s major trading partners has been stronger than expected. This has been supported by the rapid adjustment of international trade flows to higher US tariffs, as well as some product-specific exemptions that have reduced effective tariff rates. Strong US AI-related investment has also supported exports from east Asian economies. That said, trade policy uncertainty remains somewhat elevated, and risks to global growth are judged to remain tilted to the downside.

The recent escalation in geopolitical tensions has had a limited economic effect on Australia and its trading partners to date. However, these pose upside risks to the global inflation outlook, particularly in the near term, along with emerging capacity constraints in AI-related supply chains.

Risk premia in global financial markets continue to be very low despite the recent escalation in geopolitical tensions. Equity prices have risen in most advanced economies over the past three months and corporate bond spreads remain low. Nevertheless, the US dollar has depreciated, and gold and other precious metals prices have continued to increase. If key downside risks to economic activity were to materialise or be reassessed by financial markets, this could prompt a sharp tightening in global financial conditions with potential consequences for the global economy and, in the extreme, financial stability.

The near-term outlook for GDP growth has been revised higher and the outlook for inflation is materially higher.

Year-ended GDP growth is expected to pick up further in the near term as recent momentum persists. From late 2026, more restrictive monetary policy begins to weigh on economic activity, contributing to GDP growth moderating to be below its potential rate. Labour market conditions are expected to be broadly stable in the near term and then ease toward our assessment of full employment as GDP growth slows.

Overall, the level of demand in the economy is expected to come into balance with potential supply by the end of the forecast period, with inflation expected to remain above the target range for some time. Underlying inflation is projected to peak at 3.7 per cent in mid-2026 and remain above the 2–3 per cent range until early 2027; the outlook for headline inflation has also been revised up. As temporary factors that have been contributing to recent inflation outcomes unwind, and the assumed tightening in monetary policy eases capacity pressures, inflation is forecast to decline to be a little above the midpoint by mid-2028.

The Monetary Policy Board decided to raise the cash rate target.

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, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight. The Board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target. The Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions.