Australian Budget Improves by $5.4 Billion as Major Banks Forecast February Rate Hike

Budgetary Outlook Shows Improvement

Australia's federal budget is set to record a significant improvement, with the deficit for the current financial year (2025-26) projected to be $5.4 billion better than previously anticipated. This positive revision was announced by Treasurer Jim Chalmers on Wednesday, December 17, 2025, as part of the Mid-Year Economic and Fiscal Outlook (MYEFO). The updated forecast now places the 2025-26 deficit at $36.8 billion, a reduction from the $42.2 billion initially predicted in the Pre-election Economic and Fiscal Outlook (PEFO).

Treasurer Chalmers highlighted that the government's decisions have contributed to improving the budget's bottom line for the first time in eight years, emphasizing 'responsible economic management'. The improvement is partly attributed to factors such as higher-than-expected inflation boosting tax receipts, sustained key export prices, and a stronger performance in share markets. The MYEFO also detailed $20 billion in savings and reprioritisations.

Major Banks Predict February Interest Rate Increase

In a notable shift from earlier predictions, two of Australia's largest financial institutions, Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB), are now forecasting an interest rate hike by the Reserve Bank of Australia (RBA) in February 2026. The RBA's next Monetary Policy Board Meeting is scheduled for February 2-3, 2026.

CBA economists anticipate a 0.25 percentage point increase, which would raise the official cash rate to 3.85 per cent. NAB, on the other hand, is predicting two 0.25 percentage point hikes, with one in February and another in May, potentially pushing the cash rate to 4.10 per cent by the end of 2026.

Economic Factors Driving Forecasts

The revised interest rate forecasts stem from several key economic indicators, including:

• Persistent Inflation: Inflation has proven more stubborn than initially expected, with RBA Governor Michele Bullock previously warning that risks to inflation have 'tilted to the upside'.
• Stronger Economic Growth: Australia's economy has shown more resilience and stronger-than-expected growth, contributing to capacity constraints.
• Tight Labour Market: Labour market conditions remain tight, adding to inflationary pressures.

For homeowners, a single 0.25 percentage point rate hike could increase monthly repayments on a $600,000 loan by approximately $90. If NAB's prediction of two hikes materializes, monthly repayments could rise by $180. While CBA and NAB have adjusted their outlook, other major banks like ANZ maintain their forecast for rates to remain unchanged, and Westpac anticipates an extended hold through 2026 with potential cuts in 2027.

Conclusion

The latest economic updates present a mixed but evolving picture for Australia. While the federal budget shows a healthier position due to improved revenues and government savings, the prospect of rising interest rates looms for households and businesses. The RBA's upcoming February meeting will be closely watched for its decision on the cash rate, which will significantly impact the economic landscape in the coming year.