The Australian Government released Budget 2026-27 tonight.

Last year’s Budget was delivered against an uncertain backdrop related to US tariff increases. This year, it’s the Middle East conflict taking centre stage.

Consequently, the Government is delivering modest cost of living support (fuel excise cut; worker tax offset) and is spending on aspects of the economy’s resilience (e.g. improving domestic fuel stocks over time).

Our two areas of focus in this Budget are:

• what does it mean for aggregate demand and inflation?

• will any policy reforms shift the dial on Australia’s productivity growth?

In short, net changes in this Budget are - at face value - unlikely to materially change the overall demand outlook in the near-term. For instance, the structural budget deficit is expected to be little changed as a share of GDP in 2026-27 - implying little federal fiscal impulse - compared with a noticeable deterioration in the current fiscal year.

At the same time, however, federal government spending is expected to remain at a relatively high share of GDP. Add in what might be best described as reckless spending by some state governments and the public-sector’s contribution to economic growth is likely to remain quite solid overall.

Moreover, prior budget forecasts of slower growth in federal government spending have proved wide of the mark.

The forecast slowing in real federal government payments growth remains significant from 2026-27. Achieving this, on the other hand, is a different matter, and relies heavily on successfully reining in NDIS-related spending growth.

On productivity, policy changes in the Budget are welcome but are likely to have only incremental effects on Australia’s productivity growth.

The Government should receive some kudos for tackling the spiralling cost of the NDIS as outlined in a recent speech by the Minister for Health. But to dress this up as “reform” is disingenuous when the reality is different. The significant expected budget savings associated with the NDIS - $37.8b over the 5 years to 2029-30 - are more akin to fixing something that is clearly broken rather than ‘reforms’ per se.

Without meaningful reform, the budget’s reliance on income tax as a source of revenue will only increase further, as it is forecast to in tonight’s Budget. This sets up the Government to announce income tax cuts in the lead up to the next election.

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The RBA Monetary Policy Board raised the cash rate to 4.35% today as widely anticipated, including by us. The Board vote was split 8-1.

Governor Bullock noted in the press conference that the Board now assesses the cash rate as being “a bit restrictive”.

The Bank’s baseline underlying inflation forecasts - which assume that the conflict is resolved soon and fuel prices decline - were increased for the coming year. Nonetheless, the Board assessed that “the risks remain tilted to the upside”.

That’s hawkish.

But the Board is clearly also appropriately worried about the risk of adverse growth effects from a period of prolonged uncertainty and disruptions to commodity flows.

The Bank provided two scenarios along these lines which show even higher inflation and unemployment rate outcomes and weaker growth (than baseline outcomes). Importantly, however, those scenarios revolve around higher fuel prices and assume that Australia continues to receive enough imported fuel products to meet domestic demand.

The Board’s statement noted that “[h]aving raised the cash rate three times, monetary policy is well placed to respond to developments”. Governor Bullock noted in the press conference that that Board feels that policy settings now allow it to better assess both downside and upside risks to the outlook.

One interpretation of these comments is that the Board may currently be leaning towards sitting on the sidelines in the near term to see how the Middle East situation and economic data evolve.

A pause at the next Board meeting on 16 June, however, would mean that the next opportunity to change policy settings is 11 August, more than three months away.

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Housing price growth in Australia remained multi-speed in April but slower growth is starting to spread.

Dwelling prices continued to decline in Sydney and Melbourne. It’s not unusual for prices in the two major capitals to exhibit more volatility than elsewhere.

Overall, nationwide dwelling prices rose +0.3% m/m in April in Australia and just +0.2% m/m in the capital cities.

The slowing in dwelling price growth began before the RBA increased the cash rate in early February, but that is not unusual. Households’ appetite to buy housing has waned.

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New Zealand’s Q1 CPI will be released next Tuesday.

The RBNZ upgraded their year-ended headline inflation forecast to +3% from +2.8% previously. This implies a quarterly outcome of +0.8% q/q.

The release of monthly price data for March allowed Q1 inflation nowcasts to be firmed up. See here for our wrap of the monthly price indicators.

While sharply higher fuel prices in the month of March will support headline inflation in Q1, the largest impact will show up in Q2 inflation if high fuel prices persist.

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We have updated our comprehensive chartpack on labour markets in Australia and New Zealand.

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Labour market outcomes in coming months will be key to central bank policy deliberations against a backdrop of rising and above-target inflation and the Middle East conflict.

For now, central banks will fret about inflation and inflation expectations, particularly those in economies with little spare capacity, including the RBA which we expect to tighten policy further in coming months.

Any signs of weakening labour market conditions, however, will provide central banks with some assurance that first-round inflationary effects of the conflict won’t leak into damaging second-round effects on inflation.

Historically, a rising unemployment rate has typically seen the RBA (and Fed) initially holding interest rates stable for a period of time before easing policy.

While rising inflation due to supply-side factors creates complexities for central banks, our view is that they will ultimately find it difficult to not act if unemployment rates persistently rise.

For the RBA, however, the jobless rate is clearly below that consistent with “full employment” and will need to rise to tame inflation.

For now, labour market conditions in Australia remain tight by historical standards and compared with most other advanced economies. While market-sector firms have lifted their hiring there is a risk that prolonged uncertainty will weigh on their appetite to take on more employees.

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Housing price growth in Australia has become multi-speed in recent months. While growth remains strong in Perth, Adelaide and Brisbane, prices fell in Sydney and Melbourne in March for the second consecutive month.

That slowing began well before the RBA increased the cash rate in early February and has occurred amid some waning in households’ appetite to buy housing.

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Australia’s March CPI will be released on 29 April and will include Q1 trimmed mean inflation under the pre-October 2025 methodology. This remains the key focus for the RBA.

We have firmed up our bottom-up Q1 CPI inflation forecasts following today’s February CPI.

March month nowcasts

Our nowcasts for the March monthly CPI and key categories are in the table below.

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RBNZ Governor Breman’s speech this morning - Global shockwaves to Kiwi shores: The impact of the Iran conflict on New Zealand - pushed back against market pricing for the OCR.

Our view is that market participants have been getting way ahead of themselves is terms of the degree of OCR increases priced in for this year (up to +90bps).

The NZ economy has significant spare capacity and even though it has turned the corner, the adverse growth consequences of the Middle East conflict come at an inopportune time.

The Governor’s opening remarks said it all:

“…core inflation has been steady at 2.4 percent for some time. We are at the early stages of an economic recovery. Inflation expectations over the medium term remain well anchored, and wage growth is subdued.”

The starting point for underlying inflation - based on our quarterly seasonally adjusted measures - is low and broadly consistent with the mid-point of the 1-3% target.

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Australia’s February CPI will be released on Wednesday, 25 March.

The February CPI will allow us to gauge with some confidence whether underlying inflation in Q1 is likely to have remained as elevated as the RBA expects. The Bank has pencilled in +0.9% q/q for Q1 trimmed mean inflation.

Clearly the conflict in the Middle East means that the February CPI will be somewhat old news. The outlook for inflation is now hostage to how long the conflict persists.

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The RBA Monetary Policy Board raised the cash rate by 25bps to 4.10% today but it was a split vote of 5 members in favour and 4 opting for no change.

The last back-to-back rate hikes were in May/June 2023.

Markets initially interpreted the hike dovishly, with Aussie 3-year bond yields falling and AUD/USD depreciating a little.

Market pricing implied roughly a two-thirds chance of a hike today and most market economists flipped to a hike after Deputy Governor Hauser’s hawkish interview last week (see Don’t bet against the Hauser).

We were a bit more circumspect, noting clear arguments to hike (on domestic macro fundamentals) or hold (on conflict-related uncertainty).

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It is highly likely this was Deputy Governor Hauser’s plan all along in a seemingly last minute podcast interview and not long before today’s 2pm AEDT blackout kicked in.

We recently outlined our view about near-term monetary policy in Should I stay or should I go, with the key takeaways being:

Over overarching view is that monetary policy in Australia needs to be at least a bit tighter. Based purely on domestic factors and pre-conflict evidence of improving global economic activity, a back-to-back rate hike this month would be entirely defensible and sensible in our view. The current uncertain global backdrop, however, lends itself to waiting until May.

Hauser’s interview certainly tests our conclusion about the timing of the next rate hike.

Hauser’s interview got us thinking about the motivations behind it?

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In our previous two Compendiums we characterised the Australian labour market as being at a crossroad.

On the one hand it was becoming clearer that demand growth was strengthening and firms were reporting tighter capacity in the economy. In contrast, there were signs that the composition of employment growth had shifted away from being largely dependent on hiring in non-market industries, potentially creating an ‘air pocket’ in jobs growth.

Fast forward and the unemployment rate fell to just 4.1% in December and stayed there in January.

The bigger picture hasn’t changed.

Labour market conditions remain relatively tight, though we expect part of the recent decline in the jobless rate to unwind in coming months.

The recent decline in the unemployment rate has coincided with rising job advertising and a continuation of a high share of firms reporting that labour is difficult to find.

But employment growth has slowed and the share of working-age people in work in Australia has steadily declined over the past year.

As is often the case, the labour force participation rate has declined alongside falling employment propensity.

Much of the decline in labour force participation over the past 6-12 months has been accounted for by age groups 45+ years old. This may be consistent with many firms keeping a keen eye on labour cost growth and cutting - or hiring fewer - older, more expensive staff.

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The RBA Monetary Policy Board meets on 16-17 March.

Interest in this meeting has surged since Governor Bullock strayed this week from emphasising that the Board would likely take a “cautious” approach to saying that the March meeting will be “live” and the “Board will be actively looking at whether or not it needs to move more quickly”.

The Board papers are currently being drafted against a very uncertain global backdrop due to the Middle East conflict.

Who knows how long the conflict will last but the Board is likely to be provided with scenario analysis on different paths - including timeframes - for the conflict. It may be largely over by the time of the Board meeting, or it may not be.

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Our focus this month is on Australia given little new information and action in New Zealand’s housing market.

Housing price growth in Australia has become multi-speed in recent months. While growth remains strong in Perth, Adelaide and Brisbane, it has stalled in the larger cities of Sydney and Melbourne.

That slowing began well before the RBA increased the cash rate in early February and has occurred amid some waning in households’ appetite to buy housing.

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Early-year volatility in labour force data in recent years, however, suggests some caution may be warranted in not overinterpreting recent labour force data.

It has been floated that a potential reason for that volatility after the pandemic was because of relatively large spikes in the number of non-employed future job starters early in the year. These are people waiting to start a job but counted as either unemployed or outside the labour force. Indeed, the unemployment rate rose in January in each of 2023, 2024 and 2025 by more than 0.1ppts before falling thereafter.

Helpfully, the ABS again published analysis on monthly “job attachment” as it has alongside January labour force data since 2023.

Our focus here is to gauge whether changes in the number of future job starters, particularly around the start of the year, have temporarily influenced reported employment and unemployment.

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Australia’s January CPI will be released on Wednesday, 25 February.

The January CPI will provide an early gauge of whether underlying inflation in Q1 is likely to have remained as elevated as the RBA expects. The Bank has pencilled in +0.9% q/q for Q1 trimmed mean inflation but we view the risks as skewed to the downside.

Headline CPI inflation in January will be significantly boosted by electricity prices which will have risen sharply as government rebates ended in December (except in WA).

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The RBA Monetary Policy Board raised the cash rate to 3.85% today as widely anticipated, including by us. The time between the last cut and today’s hike is 6 months which is within the range of timeframes seen in the past in Australia (see chart).

The decision was unanimous, including Treasury Secretary Wilkinson voting for the hike - a surprise to some commentators.

While no Australian government likes interest rates going up, with the next federal election due by mid-2028 we suspect the Government won’t make too much noise about today’s hike. It will hope that the macro backdrop remains sound and tighter policy takes care of higher inflation by 2028 given voter concerns about the cost of living. In the meantime we expect the Treasurer to continue to reference the “independent” RBA…

The Board’s statement, accompanying Statement and increases to the underlying inflation outlook are unequivocally hawkish.

Tellingly, the first key risk to the forecasts identified in the SMP is that the “central projection may place too much weight on the role of temporary factors in driving recent inflation outcomes”. In other words, the Bank is worried that capacity pressures may have been playing a larger role than assumed in the stronger inflation outcomes in H2 2025.

The pick-up in (private) demand growth over H2 2025 has been much faster than the Bank expected and - as the Governor and SMP noted today - the Bank/Board has underestimated the degree of excess demand in the economy. As a result, the labour market has been more resilient, and inflation higher, than expected.

Our summary: the Board got fed up waiting for inflation to return towards the mid-point of the target and is, for now, more worried about upside risks to the inflation outlook.

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Momentum in the Australian housing market is facing a test if the RBA Board lifts the cash rate tomorrow.

To date, lower interest rates, excess demand and ramped-up government incentives for first home buyers have supported a relatively strong pick up in dwelling prices.

While monthly dwelling price growth in Australia slowed a little over December and January (post seasonal adjustment), it remained strong. Price growth remained fastest in Perth, Brisbane and Adelaide, and considerable more moderate in the largest cities of Sydney and Melbourne.

Nationally, the stock of homes for sale remained at a low level in January, and much lower than at the start of the year despite reasonably healthy new listings. This dearth of supply is likely to support solid housing price growth in at least the near-term.

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New Zealand’s Q4 CPI will be released this Friday.

The release of monthly price data for December allowed Q4 inflation nowcasts to be firmed up. See here for our wrap of the monthly price indicators.

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Australia’s Q4 CPI will be released on 28 January.

Following today’s November monthly CPI we have made some tweaks to our preliminary Q4 CPI preview (available here).

As discussed in our preliminary preview, our Q4 nowcasts are based on the pre-October methodology, including collection frequency and seasonal adjustment of CPI expenditure components (though we do highlight some challenges). This approach means that some of the discounting that occurs in November (e.g. ‘Black Friday’) and December (pre-Christmas sales) does not enter our Q4 nowcasts.

The RBA have said that inflation measures based on the pre-October methodology will remain their primary focus for the time being. Nevertheless, we expect Bank staff to interrogate the monthly CPI detail to get a feel for the momentum of underlying inflation through the quarter.

Our key takeaway is that underlying inflation appears to have moderated a little in Q4 but remained strong and above the RBA’s November SMP assumption (and well above the mid-point of the 2-3% target).

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