Mortgage holders, brace yourselves! The Australian economy is revving its engines a little too fast, and it might just lead to some unwelcome surprises.
As we eagerly await the official figures for Australia's gross domestic product (GDP), economists are sounding an alarm: demand seems to be outpacing supply, a classic recipe for rising inflation and, unfortunately, more interest rate hikes.
But here's where it gets controversial... Commonwealth Bank (CBA) is projecting a strong surge of 1% in the Australian economy for the final quarter of 2025, capping off a robust 2.7% for the entire calendar year. While this rebound is certainly a positive sign, it's also creating some significant headwinds.
Harry Ottley, an economist at Commonwealth Bank, explained that while the speed of the economic bounce-back is a "good thing," it has also presented challenges. "Overall our sense is the economy is growing a little too quickly for comfort," he stated. "As a result, we think the Reserve Bank will increase interest rates in May. We also think there is a decent chance they go in March, but that is not our base case."
And this is the part most people miss... The strong economic performance is largely fueled by robust household spending, projected to be up 0.7%, alongside a 0.3% increase in business investment and a 0.9% rise in government spending for the quarter. "It caught most people by surprise how strong the rebounds have been, but it does add to capacity constraints in the economy," Mr. Ottley noted.
The major bank highlights that the national economy is now growing at 2.7%. The Reserve Bank of Australia (RBA) has previously indicated that growth exceeding 2% can contribute to inflation. CBA, however, suggests that the current supply constraint might be closer to 2.1%.
Ben Udy, lead economist at Oxford Economics Australia, observed that demand has been on an upward trend for the past six months. "The economy has been growing really strong, and demand is outstripping supply, and that is passing through to higher prices, and that is why the RBA is reacting," he explained. "They are trying to slow the pace of demand while supply has the chance to catch-up."
Mr. Udy went on to suggest that Australia's current interest rates might be too low. "We are expecting one more rate hike from the RBA in May, and if the economy continues to come in hot – like it did in Q4 – there could be further rate hikes needed."
A stark warning from the top: RBA Governor Michele Bullock recently addressed the AFR Business Summit, cautioning households not to dismiss the possibility of an interest rate hike in March. "I am not making a prediction about March, but it will be a live meeting," she stated. "We have inflation at 3.8% headline and we have unemployment at 4.1% tight. The board will be actively looking at whether it needs to move more quickly, so I would be discouraging people from thinking that we necessarily only move every quarter."
Headline inflation stood at 3.8% for the year to January and is expected to remain elevated for some time due to the unwinding of electricity rebates. Meanwhile, the crucial trimmed mean inflation rate, which excludes volatile items like energy and fuel, registered at 3.4%. Both figures are above the RBA's target band of 2% to 3%.
Governor Bullock also defended the February interest rate hike, describing it as the "least worst option" for households in the long run. "The danger we faced was that leaving interest rates unchanged would risk having inflation above target for longer, ultimately requiring a more aggressive tightening later and a more costly adjustment in the labour market," she remarked.
So, what do you think? Is the economy's rapid growth a sign of strength, or is it a ticking time bomb for inflation? Should the RBA be more aggressive with rate hikes, or is there a risk of stifling growth? Share your thoughts in the comments below!
