At time of writing in early March, the main areas of focus in the Australian economy are on persistent problems with inflation, and the prelude to the Federal budget in May.

The Reserve Bank of Australia raised rates by 25 basis points at its February meeting, bringing the cash rate to 3.85%. That decision reflected a pickup in Australian underlying inflation to 3.3%, above the RBA’s 2-3% target band. GDP growth in Australia stood at 2.1% and there is a view that Australia’s productivity problems put the speed limit of the Australian economy at around 2%, otherwise inflation shoots up.

The most recent inflation data came in at 3.4% underlying and 3.8% headline for the 12 months to January 2026. This puts the RBA under further pressure to lift interest rates at its March meeting.

The Treasurer has signaled that spending restraint will be an important aspect of the budget, and it has been reported that Treasury has been told to focus on “economics not politics.”

Two significant tax changes are being considered by Treasury. One would pare back the 50 per cent capital gains tax discount on investment housing to a lower level. This could involve an overall reduction in the discount on investment housing to 25 or 33 per cent. Or it might involve differential discounts based on the type of housing, as was proposed last year by the McKell Institute.

A second possible tax change is limiting the amount of negative gearing on investment properties, although the contours of that policy and the government’s appetite for it are less clear.

The RBNZ decided at its February meeting to keep the OCR on hold at 2.25% after a previous 25 basis point rate cut. This reflects the likelihood that economic activity in New Zealand is picking up without being overly inflationary. GDP growth bounced back strongly in the September 2025 quarter, growing at 1.1%. Over the course of 2025 the CPI rose from 2.2% to 3.1%. That said, core inflation excluding food and energy stood at 2.5%, within the RBNZ’s 1-3% target band.

The decision to hold maintained optionality for the RBNZ while it awaits further economic data. If the economy keeps growing strongly and inflation rises further, we can expect a rate rise later in 2026.

The RBNZ could plausibly engineer a scenario with a GDP growth rate of around 3%, keep inflation within the target band, and keep interest rates at 2.75%-3.0% by the end of 2026. With the RBA in a tightening cycle and the RBNZ holding for now, the New Zealand dollar may depreciate mildly against the Aussie.

The internal economic issues in Australia and New Zealand have been overshadowed by military actions in the Middle East. At the time of writing those military actions were just 72 hours old.

This naturally involves high politics and an uncertain future for Iran and the Middle East generally. An immediate economic impact was a surge in energy prices as traffic through the Strait of Hormuz dried up. Insurers of shipping through the Strait have either increased rates or even denied coverage. Not surprisingly, oil prices rose sharply, with the benchmark Brent crude up around 10 per cent in the days after hostilities began.

It is unlikely that there will be greater clarity about the economic impacts until late March at the earliest.