NAB Economic Outlook 2026 Warns of RBA Rate Rise | May Forecast Explained

National Australia Bank’s latest economic outlook for 2026 has sent a clear warning to homeowners, businesses, and policymakers: the Reserve Bank of Australia is likely to raise the cash rate again this year, with a key move expected in May. After months of stabilisation in interest rates, NAB now expects at least one more lift to monetary policy as inflation proves stickier than anticipated and the economy remains on a surprisingly resilient growth path. For millions of Australians, this means borrowing costs could drift higher again just as many thought the worst of the rate‑hike cycle was over.

What NAB is forecasting for growth and inflation

NAB’s 2026 Economic Outlook paints a picture of a tougher, more volatile year ahead. The bank has modestly downgraded its growth forecast for 2026, reflecting mounting uncertainty from global supply‑chain pressures, higher fuel prices, and slower demand in key trading partners. Real GDP growth is now seen coming in below earlier expectations, with the bank highlighting that cost pressures are starting to weigh more heavily on consumer spending and business investment.

At the same time, NAB has lifted its inflation outlook. Fuel‑price shocks are feeding through to transport and energy costs, and internal analysis suggests that these pressures are likely to push quarterly inflation readings higher in the first half of the year. The bank expects headline inflation to peak close to the mid‑five‑percent range in the June quarter before easing gradually as the impact of higher interest rates works its way through the economy. Crucially, NAB warns that the risk is no longer just about temporary price spikes; there is a growing danger that elevated inflation expectations could become entrenched if the Reserve Bank does not act decisively.

Household incomes are being squeezed from both sides. Real wages are rising, but not fast enough to keep pace with energy, rent, and food costs. As a result, NAB projects weaker real household consumption growth in 2026 compared with the previous year, which in turn threatens the stability of retail and service sectors that rely heavily on discretionary spending.

Why the RBA is being pushed toward a May rate rise

NAB’s central argument is that the Reserve Bank faces a delicate balancing act. The labour market remains tight, with unemployment around the low‑four‑percent mark and employment growth still strong enough to keep companies competing for workers. Wages are climbing, and capacity constraints are beginning to show up in business surveys, suggesting that the economy is operating close to full steam. In this environment, even a modest pick‑up in inflation can quickly become self‑reinforcing if expectations spiral.

Fuel prices add another layer of urgency. NAB points out that the economy entered the recent fuel‑price shock from a relatively strong position in 2026, but the extra cost of transport and energy is already feeding through to broader prices. If these costs start to feed into pay‑settlements and business pricing, the RBA will feel compelled to tighten conditions further to prevent a second wave of inflationary pressure. That is why NAB places a May rate hike in its central scenario: the bank expects the RBA to lift the cash rate by a quarter‑percentage point in that month, then pause to assess the impact, unless fresh upside data shocks emerge.

For borrowers, the implication is straightforward. The RBA could move the cash rate from its current level to around 4.1 per cent by mid‑2026, marking the first real tightening cycle since the early‑2020s cut‑fest. This would feed through to variable mortgage rates, fixed‑rate resets, and business loans, even if the total number of hikes remains modest compared with the 2022–23 cycle.

How rate hikes are expected to roll out

NAB’s interest‑rate forecast for 2026 is more hawkish than the consensus among many other economists, but it is still framed as a limited, precision‑targeted tightening rather than a full‑scale cycle. The bank’s current baseline scenario is that the RBA will deliver a single 25‑basis‑point lift in May, taking the cash rate to roughly 4.1 per cent. This would still be a modestly restrictive stance by historical standards, but enough to dampen excessive demand and steer inflation back toward the 2–3 per cent target band over the medium term.

Unlike earlier projections that assumed prolonged rate cuts, NAB now sees the RBA taking a firmer line. The bank’s economics team argues that the combination of above‑target inflation, strong private demand, and a tightening labour market means “keeping rates on hold would likely be too loose” and could allow inflation to stay elevated for longer. The risk, in NAB’s view, is that the RBA will have to hike more aggressively later if it delays action now, which would hurt the economy more sharply.

There is also a “two‑hike” scenario that NAB flags as a key risk. If inflation data in the April and May quarters proves stronger than expected, or if wage growth continues to accelerate, the bank believes the RBA could lift rates twice in 2026, with increases in both February and May. Under that scenario, the cash rate could end the year closer to the mid‑four‑percent range, reinforcing the message that the era of deeply suppressed rates is over.

Impact on mortgages and household budgets

For Australian households, the most immediate consequence of NAB’s forecast is the risk of higher mortgage repayments. Many borrowers are still on fixed‑rate loans set at pre‑2023 levels, but as those contracts roll over into variable or new fixed products, the higher underlying cash rate will translate into pricier monthly repayments. Even a 25‑basis‑point increase can add tens of dollars per month for typical borrowers, and more for larger loan balances.

NAB’s outlook notes that housing‑market conditions are already cooling, with slower price growth and a modest rise in listings, but the bank warns that the combination of higher interest rates and elevated cost‑of‑living pressures could further dampen demand. Borrowers who took out large loans during the low‑rate period may feel the squeeze, particularly if they have limited buffers in their budgets. The bank also points out that the risk of fixed‑rate limits returning to credit assessment models could make it harder for some borrowers to qualify for new loans, especially first‑home buyers already wrestling with high deposit requirements.

On the other hand, savers and cash‑rich households may see a small benefit. Deposits in at‑call savings accounts and term deposits are likely to track the higher‑rate environment, which can help offset some of the inflation pain. However, NAB stresses that these gains are unlikely to fully compensate for the broader cost‑of‑living pressures, particularly for retirees and low‑income households whose spending is heavily weighted toward essentials like food, energy, and healthcare.

Business confidence and investment plans

From a business perspective, NAB’s Outlook highlights a deteriorating but still cautious mood. Business‑confidence indicators have drifted lower over the past six months as higher rates and tighter credit conditions combine with softer global demand. Firms are more hesitant to commit to large investments, and the bank expects capital‑expenditure growth to slow in 2026 compared with the robust post‑pandemic period.

At the same time, NAB notes that parts of the economy remain resilient. Capacity utilisation in many sectors is still around long‑run averages, and firms are still hiring, albeit at a more measured pace. This resilience is part of the reason why the bank sees the RBA as likely to lean toward a May hike: if unemployment and business conditions stay too strong while inflation is elevated, the policy‑rate settings will look too loose.

Businesses that rely on credit—construction, transport, and consumer‑focused retail in particular—are likely to feel the pinch most directly. NAB’s economists warn that higher borrowing costs could delay or scale back expansion plans, potentially slowing job growth in some regions. At the same time, firms that are less reliant on debt, such as certain technology‑driven or export‑focused companies, may be better positioned to navigate the higher‑rate environment.

Housing and asset‑price outlook

Despite the clouds, NAB’s outlook is not entirely gloomy for asset markets. The bank expects house prices to keep growing modestly in 2026, supported by strong population growth and ongoing supply shortages in major cities. However, the pace of gains is likely to be slower than in the explosive 2021–22 period, as higher interest rates make borrowing more expensive and some households pull back from the market.

Commercial property and infrastructure markets are also being watched closely. With longer‑term interest rates moving higher, capital‑intensive projects—such as large‑scale housing developments and transport‑related infrastructure—could face higher financing costs. NAB suggests that this may lead to more selective deal‑making, with investors prioritising higher‑return sectors and well‑located projects that can withstand a tougher rate environment.

Shares and financial markets are likely to see increased volatility as the RBA’s path becomes clearer. Equity investors hate uncertainty, and a shift from a long‑expected easing cycle to a modest tightening cycle can unsettle markets. NAB’s economists argue that equities may underperform in the short term, especially interest‑rate‑sensitive sectors such as utilities and real‑estate investment trusts, while more defensive sectors such as healthcare and consumer staples may hold up better.

Policy implications and what to watch next

The broader message from NAB’s 2026 Economic Outlook is that Australia is entering a “higher‑for‑longer” interest‑rate phase. The central scenario is not a deep recession or a runaway inflation spiral, but a choppier year where the Reserve Bank is forced to choose between supporting growth and reining in inflation. The bank believes that the May meeting is a critical juncture: if the RBA raises rates then, it will signal a serious intent to keep inflation under control even if that means accepting some slowing in activity.

Policymakers will also need to watch how the federal and state governments respond. With higher borrowing costs at the national level, fiscal deficits may come under more scrutiny, and multi‑year infrastructure programs could be re‑examined to avoid crowding out private‑sector investment. At the same time, targeted support for vulnerable households—through energy‑bill subsidies, rent‑assistance measures, or tax‑adjustment mechanisms—may become more important if the cost‑of‑living squeeze deepens.

For the average Australian, the key takeaway is preparedness. If NAB’s forecast is correct, interest rates will be heading up again in 2026, and the “breathing space” many households hoped for after the 2022–23 hikes may be shorter than expected. Reviewing budgets, building emergency savings, and considering refinancing or loan‑structuring options before rates rise could make a meaningful difference in financial resilience over the next twelve months.