DBRS, Inc. (Morningstar DBRS) confirmed the Commonwealth of Australia's Long-Term Foreign and Local Currency – Issuer Ratings at AAA. At the same time, Morningstar DBRS confirmed the Commonwealth of Australia's Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all credit ratings is Stable.
KEY CREDIT RATING CONSIDERATIONS
Australia's AAA credit ratings are underpinned by the country's considerable fundamental strengths, including its diversified and highly productive economy, sound macroeconomic policy frameworks, and highly effective governing institutions. The Stable trend reflects our view that Australia's credit fundamentals are unlikely to be affected by near-term challenges such as above-target inflation, housing shortages, and a highly uncertain global environment.
The Australian economy is gradually rebalancing under the weight of tighter monetary policy. The economy was in a position of excess demand in late 2025, with a tight labor market, housing shortages, and above-trend inflation. Demand-side pressures on inflation were compounded by higher energy prices due to the Iran conflict in early 2026, which has contributed to the delayed return to target. In response, the Reserve Bank of Australia (RBA) raised the cash rate by 75 bps cumulatively since February to 4.35%. As a result, consumption growth momentum is slowing, the housing market is cooling, and unemployment has ticked up marginally. The IMF forecasts GDP growth of 1.9% and 1.7% in 2026 and 2027, respectively. Morningstar DBRS expects the rebalancing process to continue through the end of this year.
Public finances remain sound, supporting Australia's capacity to absorb future fiscal pressures. After two consecutive years of surplus, the underlying cash balance returned to a modest deficit in FY2024-25. The deficit is expected to stabilize and gradually narrow over the medium term. The IMF projects a similar trajectory at the general government level, with the fiscal deficit steadily declining and general government gross debt stabilizing at 51% of GDP from 2026 to 2028.
CREDIT RATING DRIVERS
Morningstar DBRS could downgrade the credit ratings if one or a combination of the following factors occurs: (1) a material deterioration in medium-term growth prospects, or (2) a sustained weakening in fiscal policy discipline.
CREDIT RATING RATIONALE
Modest Fiscal Deficits Expected Over the Medium Term
After two years of fiscal surplus, Australia returned to a modest deficit position last year. The government recorded an underlying cash deficit of $10.0 billion, or 0.4% of GDP in FY2024-25. The deficit is projected to widen to 1.0% of GDP in FY2025-26 and FY2026-27. The deficit is expected to remain around 1% of GDP over the next few years, before narrowing to 0.7% in FY2029-30. The fiscal results benefit from saved revenues from bracket creep and elevated commodity prices. Over the medium term, Morningstar DBRS anticipates the deficit to remain stable due to modest revenue-raising tax reforms and expenditure restraint, including cuts to the National Disability Insurance Scheme (NDIS). Morningstar DBRS expects fiscal policy to shift from broadly neutral in FY2026-27, to modestly contractionary as the consolidation advances; thus, supporting tighter monetary policy to reduce domestic demand and inflationary pressures.
The government's prudent fiscal management should stabilize debt dynamics. The general government gross debt ratio (which includes the Commonwealth, as well as state, territory, and local governments) peaked at 57% in 2020 following pandemic-related stimulus. Since then, a strong economic recovery and fiscal repair reduced the debt ratio to 49%, before it stabilized at 51%. The IMF forecasts the ratio to be 51% from 2026 to 2028. The debt ratio is moderate relative to advanced economy peers. Interest costs to GDP have increased marginally since 2024 but overall remain at comparatively modest levels. Additionally, the government's balance sheet benefits from the low level of unfunded pension liabilities, which puts the public sector in a comparatively strong position to manage future pension costs.
The RBA is Tightening to Contain Inflation; Housing Market Outlook Softens
The RBA started hiking interest rates this year in response to building price pressures. Annual headline inflation was 4.0% in May, down from 4.6% in March but above the RBA's 2-3% target band. Inflation has been partly driven by higher fuel prices, but broader price pressures reflect an economy operating above capacity. Underlying inflation (trimmed mean) rose to 3.6% in May and has remained above the RBA's 2-3% target band since September 2025. Inflation is likely to return to the RBA's target range only gradually as the impact from higher rates flows through the economy. At 4.35%, the monetary policy stance is slightly restrictive. Morningstar DBRS expects the RBA to maintain its data-dependent approach while assessing the impact of this year's policy rate increases on domestic demand.
Australia's housing market is softening as higher borrowing costs, affordability pressures, and lower sentiment weigh on demand. Housing price growth is easing following strong gains in 2025. Recent federal housing tax changes related to negative gearing and capital gains add uncertainty to the outlook and may dampen investor appetite in the near term. While subdued demand may help moderate house prices, Australia's persistent housing supply shortage limits the magnitude of any decline. Increasing supply has been a challenge due to high construction costs, labor shortages, and strict planning and zoning rules. In the first quarter of this year, about 40% of construction firms regarded labor as a significant constraint to output. Additionally, the rental market remains tight, with the vacancy rate near record lows amid limited supply.
Financial stability risks appear contained. High household debt and predominately variable-rate mortgages make Australian consumers sensitive to renewed interest rate increases. However, most household balance sheets have strengthened since mid-2024, supported by lower inflation, tax cuts, and declining interest rates. The majority of Australian mortgagors also have large prepayment buffers through offset accounts or redraw facilities. Thus, most borrowers are well-positioned to handle the renewed borrowing cost pressures, with only a small portion facing greater challenges. Mortgage arrears remain at low levels, supported by a resilient labor market and previous housing price gains. Even if economic conditions significantly deteriorate, the Australian banking system is well-positioned to absorb potential loan losses and maintain lending. The large Australian banks are well-capitalized with a high level of liquid assets. Their leading domestic franchises consistently generate robust profitability.
Australia's Medium-Term Growth Prospects Remain Comparatively Strong, but China Is a Key External Risk
The Australian economy has outpaced most peer economies in terms of growth for several decades. The drivers of growth have been multifold. Structural reforms in the 1980s and 1990s helped lay the foundation for a prolonged period of expansion. From the 2000s, Australia benefited from rapid growth in China, which greatly increased demand for Australian goods and services and fostered a decade-long investment boom. Robust population growth has also supported the Australian economy for two decades, but accelerated sharply in recent years, as net migration surged post-pandemic. Net overseas migration (NOM) peaked in the third quarter of 2023, with a record net inflow of over 555,000 migrants, accounting for the vast majority of the country's population growth. Net inflows have since moderated to about 300,000 in the fourth quarter of 2025 (on a rolling 4 quarter basis), which is still slightly above pre-pandemic levels. The government expects NOM to normalize further under tighter migration policy settings, but Australia's medium-term growth prospects remain comparatively strong. The IMF estimates Australia's potential GDP growth at 2.3%, which is the highest among the G7 countries.
The key external risk to the medium-term growth outlook is a sharp deceleration in Chinese growth. Persistent weakness in the Chinese real estate sector and the potential for further escalation of trading restrictions by key trading partners pose risks to China's outlook. In the event of a prolonged slowdown in China, Australia would primarily be affected through the terms of trade channel. Metals, coal, and fuel products account for more than half of Australia's exports and are exposed to price fluctuations. As Australia's principal trading partner, China accounts for about one-third of total Australian exports. The deterioration of China's property sector could lead to a reduction in demand for Australian commodities like iron ore and natural gas. Moreover, spillovers from weaker Chinese growth could also weigh on Australia's education and tourism exports, where China remains a leading source of demand. From a trade standpoint, relations between Australia and China have stabilized since the pandemic. However, some tensions remain on the security front, especially as Australia strengthens its defensive partnerships across the Asia-Pacific region. The one-category adjustment to the 'Economic Structure and Performance' building block assessment reflects the risks stemming from Australia's reliance on China as a key trading partner.
Australia's external accounts appear broadly in line with economic fundamentals. Australia has been a perennial net importer of capital for decades, but the current account moved into surplus from 2020 to 2022, supported by higher commodity prices and production, and the recovery of services exports. Since then, the current account returned to a deficit and widened to 2.6% of GDP in 2025. Normalizing commodity prices, stronger imports, and softer export demand account for the shift. Morningstar DBRS expects the current account deficit to narrow slightly and then stabilize over the medium term. The net foreign liability position declined from 60% of GDP in 2016 to 22% in 2025, with the change largely driven by increased holdings of foreign equities and favorable valuation effects. Risks to balance sheets stemming from currency volatility appear relatively limited and a sizable share of foreign liabilities are in the form of equity. Australia's floating exchange rate also provides a buffer against risks related to commodity price volatility and global uncertainties.
Strong Institutional Quality Underpins Australia's AAA Credit Rating
Australia's robust political institutions are a fundamental strength of the sovereign credit profile. Australia is a stable, liberal democracy with effective governing institutions. The political environment is characterized by strong rule of law, a sound regulatory environment, and low levels of corruption. For over seven decades, Australia's political system has been dominated by two main blocs: the Labor Party and the Liberal-National coalition. Recent polling points to the rising popularity of the One Nation party, which may be an early indication that the party system is coming under greater fragmentation.
The ruling Labor Party, led by Prime Minister Anthony Albanese, holds 94 out of 150 seats in the House of Representatives. Nonetheless, the Labor Party holds a minority position in the Senate. As a result, the Labor Party needs to negotiate with the crossbench, such as the Greens or independent senators, to pass legislation in the upper house. Key policies of the Labor government include expanding housing supply and infrastructure, advancing the net-zero transition, strengthening public services, and pursuing fiscal consolidation. The next federal election is due by May 2028.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (July 20, 2026) https://dbrs.morningstar.com/research/485522.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/485679.
Notes:
All figures are in Australian dollars unless otherwise noted. Public finance statistics reported on a general government basis unless specified.
For more information, visit dbrs.morningstar.com