Australia's economy is approaching full capacity after a surprise jump in inflation, rising house prices, and a tightening labor market, forcing the Reserve Bank of Australia (RBA) to weigh whether to hold interest rates steady or act in 2026, Commonwealth Bank of Australia's (ASX:CBA) Chief Economist Luke Yeaman said in a report on Tuesday.

Deputy Governor Hauser's speech also outlined two economic paths, one involving restrictive policies and temporary inflation that could lead to rate cuts in 2026 and the other involving stronger demand and persistent inflation that might prompt further rate hikes.

September's inflation surge reflects mostly temporary price pressures, but persistent increases in housing and services suggest ongoing capacity constraints that may keep the RBA cautious on rate cuts, Yeaman said.

Australia faces upside risks if growth exceeds potential or capacity is tighter than expected, which could prompt rate hikes, while higher unemployment or a hawkish RBA could slow recovery and reopen the case for rate cuts.

Additionally, Hauser highlighted in the speech that boosting productivity could raise Australia's economic "speed limit," enabling faster growth without fueling inflation and easing future monetary policy constraints.

Slower income growth and a mildly restrictive monetary policy should restrain broad inflation, but with the economy near full capacity, the RBA is likely to keep rate cuts off the table and could hike in 2026 if growth picks up, Yeaman added.