Key Highlights

  • The downside scenario has output about 1 per cent lower by the end of 2028.
  • Unemployment would be 0.3 percentage points higher in that scenario.
  • Households and businesses react more sharply to oil prices, rates and house prices.
  • The scenario is a risk case rather than the central forecast.

Every Central Bank forecast is a best guess, and the Reserve Bank of Australia is explicit that its November 2026 central forecasts could prove wrong in either direction. To show what a weaker path might look like, the Statement on Monetary Policy sets out a downside activity scenario. It is not a forecast and not a prediction. It is a "what if" exercise designed to illustrate the risks the Bank is weighing.

In that scenario, GDP is about 1.0 per cent lower by the end of 2028 than in the central forecast, the Unemployment rate is 0.3 percentage points higher, and Inflation is only modestly lower.

What triggers the downside case

The scenario rests on one key assumption: that households and businesses respond more strongly than the RBA's central forecast assumes to three pressures already bearing on the economy.

  • Oil prices. The RBA's oil price assumption for the December quarter 2026 is 35 per cent higher than in August, with Brent Crude assumed at US$109.5 a barrel. The Monetary Policy Board's statement noted that "The Middle East conflict remains unresolved".
  • Interest rates. The cash rate target rose by 25 basis points to 4.85 per cent on 3 November, the fifth increase of 2026. The Board's statement said "The increases in the cash rate target since the beginning of the year have tightened financial conditions."
  • Falling house prices. National housing prices were 4.7 per cent below their March peak in September, according to the Statement's economic conditions chapter. The Board's statement said "housing prices have fallen significantly".

In the central forecast, these forces already slow the economy. In the downside scenario, the reaction is larger — for example, households cutting spending more sharply, or businesses pulling back further on Investment and hiring.

The RBA's central forecasts for December 2028 are GDP growth of 1.5 per cent over the year and an unemployment rate of 5.1 per cent. Adding the scenario's 0.3 percentage point increase to that unemployment forecast gives roughly 5.4 per cent by end-2028. That figure is simple arithmetic on the RBA's numbers rather than a figure the Bank publishes, but it gives a sense of scale.

The GDP effect is described as a level: output about 1.0 per cent lower by end-2028 than in the central case. That is a cumulative shortfall built up over the forecast period, not a single year of 1 per cent weaker growth.

The uncomfortable part: inflation barely moves

The most striking feature of the scenario is what happens to inflation. Despite weaker activity and higher unemployment, inflation is only modestly lower than in the central forecast.

That combination matters for monetary policy. A conventional downturn usually gives a central bank room to ease, because weaker demand pulls inflation down. In this scenario, the economy takes a meaningful hit, yet inflation provides only limited relief. The Monetary Policy Board's statement acknowledged this kind of trade-off: "there are scenarios where inflation is higher and activity lower than forecast."

The RBA's central forecasts already have inflation above target for some time. Headline CPI is forecast to peak at 4.5 per cent in the December quarter 2026, with trimmed-mean (underlying) inflation at 3.6 per cent at that point. The Statement says inflation is expected to return to the top of the 2–3 per cent target range in late 2027 and reach the midpoint in mid-2028. On the latest data, headline CPI was 3.9 per cent and trimmed mean 3.7 per cent over the year to the September quarter.

The other scenarios

The downside activity case is one of several risks the Statement discusses, and they do not all point the same way.

  • Energy and expectations. If crude stays around US$100 a barrel with elevated refined product prices, underlying inflation would be around 2¾ per cent by end-2028 rather than about 2½ per cent.
  • AI demand. Stronger AI-related demand could keep global growth and inflation higher and add to domestic capacity and construction cost pressures.
  • Capacity. The Bank notes that uncertainty about capacity cuts both ways: pressures may be understated, or labour Supply may be stronger, pushing unemployment higher.

The Statement's overall judgement is that domestic inflation risks remain skewed to the upside, while risks to domestic activity are broadly balanced. the downside activity scenario is a plausible risk, but the RBA does not judge it more likely than an upside surprise to growth.

Household buffers and the Board's framing

The RBA's October 2026 Financial Stability Review offers some context. It found that most borrowers are well placed for softer growth and lower housing prices, with most having positive Equity and large savings buffers, and that banks are well capitalised. Its summary was that "the Australian financial system remains resilient, but there's no room for complacency."

That assessment does not rule out hardship for individual households, and the downside scenario describes a weaker economy in which more people would be out of work. But it suggests the financial system is in a position to absorb some additional stress.

The Board's 3 November decision was taken by majority — six members voted to raise rates and three to leave the cash rate target at 4.60 per cent — and the statement gives no reasons for the minority view. The majority judged that "a further tightening in financial conditions is warranted to support the return of inflation to target."

Looking forward, the Board's statement said it "will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions," adding that "Monetary policy is well placed to respond to developments". The forecasts underpinning the central case use a cash rate path based on market pricing as at 28 October 2026, not a commitment from the Board.

The bottom line

The RBA's downside activity scenario imagines households and businesses reacting more strongly to high oil prices, higher interest rates and falling house prices. The result would be GDP about 1 per cent lower and unemployment 0.3 percentage points higher by end-2028, with inflation only modestly lower. It is an illustration of risk rather than a forecast, but it highlights the difficult trade-off the Board faces: a weaker economy would not necessarily bring quick relief on inflation. The next decision is due on 8 December 2026.