Australia is entering 2026 facing a more complex economic environment, with persistent inflation, strong labour market conditions and renewed momentum in parts of the resources sector placing upward pressure on interest rates.
Ivan Colhoun, Consulting Economist at Bank of Sydney, says these conditions are increasingly pointing towards tighter monetary policy in the months ahead.
According to Colhoun, the latest inflation data confirms that price pressures are proving more stubborn than policymakers had anticipated. The December quarter CPI showed underlying inflation running well above levels consistent with the RBA’s 2.5 per cent target, following a second consecutive upside surprise.
Combined with low unemployment, stronger consumer spending and an improving outlook for residential construction, Colhoun says the Reserve Bank has limited scope to delay tighter monetary policy.
Against this backdrop, Bank of Sydney has outlined several key considerations for households and businesses as they prepare for the year ahead.
Interest rates: Why pressure is increasing
Expectations of interest rate cuts have now clearly shifted toward further increases. Bank of Sydney’s outlook notes that inflation is currently tracking around the 3–3.25 per cent range – a level that is unlikely to moderate without tighter financial conditions.
For households with variable-rate mortgages, even modest rate rises can translate into higher monthly repayments. Borrowers nearing the end of fixed-rate periods are encouraged to review their loan arrangements early to avoid sudden repayment shocks.
Cost control remains essential
While economic conditions are showing signs of resilience, Bank of Sydney cautions that the cumulative impact of price and cost increases over recent years continues to place pressure on household and business budgets.
The outlook emphasises the importance of maintaining strong budget discipline, managing discretionary spending and building financial buffers. For businesses, this includes closely monitoring operating costs, improving efficiency where possible and ensuring cashflow remains resilient as financing costs rise.
A stronger Australian dollar brings both opportunities and challenges
One of the more notable developments highlighted in Bank of Sydney’s outlook is the strengthening of the Australian dollar, which has risen above US$0.70 after spending much of the past three years trading at lower levels.
Colhoun attributes the currency’s recovery to sharp rises in commodity prices — particularly gold, copper and lithium — driven by a combination of geopolitical uncertainty, the global energy transition and growing investment linked to artificial intelligence.
For households, a stronger dollar can help reduce the cost of overseas travel and imported goods. For businesses, particularly those reliant on imported inputs or equipment, currency strength may help offset some inflationary pressures, although exporters will need to monitor the impact on margins.
Mining momentum and flow-on effects
The outlook also identifies the emergence of a “mini mining boom”, centred on select commodities rather than broad-based resource expansion. While unlikely to replicate the scale of previous mining booms, this trend is expected to support growth in specific sectors of the economy.
Bank of Sydney advises businesses connected to mining supply chains to plan conservatively, using periods of stronger demand to strengthen balance sheets rather than overextending during sector-specific upswings.
Navigating global uncertainty
Beyond domestic factors, Bank of Sydney’s outlook highlights continued global volatility, particularly stemming from US policy uncertainty and geopolitical tensions. These forces are contributing to market fluctuations and reinforcing the need for cautious financial planning.
For Colhoun, the key message for 2026 is preparation rather than prediction.
“With interest rates likely to remain higher for longer and global conditions remaining uncertain, proactive financial management will be essential for households and businesses alike,” he said.
For more information, please visit banksyd.com.au.
