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Key points:
- The Q4 CPI confirmed that Australian inflation is sustaining at an above target rate. With low unemployment, stronger consumer spending and a boost from mining, inflation won’t moderate without tighter monetary policy. The first interest rate increase is likely to occur at February’s Board Meeting next week.
- At least a small mining boom seems likely given the continuing sharp rises in the prices of precious metals, copper and lithium. These developments reflect a combination of geopolitics and the AI boom.
- The AUD remained relatively undervalued and mostly stable over much of 2025, however towards the end of the year reconnected with commodity prices and has risen above US$0.70 early in the new year. Further appreciation appears likely.
Persistent inflation and a strengthening economy make a February rate rise highly likely
The RBA’s December Board Meeting Minutes warned that at the February Meeting, the Board would consider both the persistence of inflation and the likelihood that inflation would moderate to 2.5% as forecast by the staff in November. The Q4 CPI released in late January printed the second consecutive unwelcome inflation surprise for the RBA. The trimmed mean CPI rose 0.9% q/q, after increasing 1% q/q in Q3.
That’s well above rates consistent with 2.5% inflation and signals that inflation is persisting at around a 3-3.25% rate. That leaves the Board with little option but to enact somewhat tighter monetary policy, beginning at the February Board Meeting. Other recent “background” economic developments reinforce this conclusion given ongoing very low unemployment, somewhat stronger consumer spending and a likely stronger contribution to growth from both mining and residential construction as 2026 develops.
The major forces shaping the economy and business in 2026
At the end of last year, we nominated many of the same forces driving the economy over 2025, as key factors affecting the business outlook for this year, namely:
- AI and the associated investment boom.
- Geopolitics and President Trump’s policies.
- Previous significant rises in prices and costs.
We also switched the direction of influence of interest rates from cuts to increases, reflecting stronger inflationary pressures in Australia and some expected strengthening in the economy on the back of an emerging recovery in residential construction. The remainder of our previously identified longer-term Megatrends also remain in play: Climate Change and the Energy Transition, the Ageing Population, and Rising Inequality.
During the past few weeks, we have unfortunately been too frequently reminded of the uncertainty that arises from volatile US policies - Greenland, new tariff threats against Europe and Canada, and continuing pressure on the Federal Reserve being the most recent examples.
The Geopolitical pressures and Trump policy uncertainties appear to be coalescing in precious metals markets, while the AI boom and renewables demand have been very supportive for copper and lithium prices. The price rises in these metals have been very large.
As a result, we’re adding a new “big force” affecting the Australian economy this year, namely a mini mining boom. The description of a mini mining boom is deliberately chosen to reflect the fact that the commodities rising in price are a relatively narrow part of the Australian commodity basket and as yet there are not currently the very large energy projects that dominated the landscape of the late 2000s’ and early 2010s’ mining boom.
The AUD/USD finally reconnects with commodity prices
The AUD/USD spent most of the past three years trading between US$0.61 and US$0.68. Unusually, the AUD did not rise as the USD fell sharply in the first half of 2025 as tariffs were introduced and US policy uncertainty increased. And for much of the second half of the year, the Aussie did not display its usual correlation with surging gold and copper prices, though it did have a general slight upward trend throughout the year.
That all seems to have changed in the past eight weeks, with the AUD jumping sharply from around US$0.64 in late November, to a high just above US$0.70 in recent trading. The rise corresponded to further surges in gold prices (up another 25% or $1000 an ounce) and copper prices (up 20%) since late November. Typically, the USD weakens when commodity prices are rising, and indeed the USD has weakened in recent weeks, with the move accelerating following rumours of a US and Japan pact to try to strengthen the very weak Japanese yen. As the chart shows, in spite of the recent gains, the AUD is arguably still not especially strong relative to the move in the USD through last year, especially if Australia is entering even a mini mining boom. At around US$0.70, it’s still some five cents below its long-term average.
What it means for your business
The prospect of an imminent interest rate rise is never a welcome prospect for most businesses or consumers. However, it remains important that costs and prices do not continue to rise at above 3% rates, coming on top of the substantial price and cost increases that have already taken place over the past four years. Businesses should continue to focus on managing costs and improving efficiency where possible to offset some of these bottom-line cost pressures.
On the more positive side of the ledger, the recent strength in selected metals prices will likely provide a boost to businesses with exposure to the relevant parts of the mining sector. More broadly, the AUD/USD is also benefiting from these higher prices, which could be helpful for import businesses or those with substantial imported components.
January also reminded that US policy will likely continue to remain volatile and provide plenty of surprises over the course of the year.
Happy New Year.
