The Commonwealth Bank of Australia has flagged a renewed inflation surge fuelled by the Iran conflict and said there was real risk the Reserve Bank could continue to raise rates after May.
The Commonwealth Bank of Australia (CBA) has sharply recast its outlook for inflation, growth, and unemployment amid the deepening Middle East conflict and warned that the Reserve Bank of Australia (RBA) could raise the cash rate beyond an already‑expected May move.
In its latest update, CBA rewrote its central predictions around a protracted war and ongoing disruption through the Strait of Hormuz.
The bank now assumes Brent crude will hover near US$120 a barrel until at least June 2026 before easing back towards US$80 through the September quarter.
Those new oil assumptions feed directly into a steeper inflation profile.
CBA now expects headline consumer prices to accelerate to around 5.4 per cent year on year in the June quarter of 2026, compared with the previous forecast peak of 4 per cent before the war.
Its projection for trimmed mean inflation has also been revised higher, with the underlying rate now seen topping out at 3.8 per cent in mid‑2026 rather than 3.4 per cent.
“Broader inflation pressure is also likely to be reinforced by supply‑chain disruptions. We assume supply‑chain pressures rise further in the near term and, importantly, remain elevated even after oil prices decline,” the bank said.
Growth downgraded, unemployment to rise
The bank said the same forces driving inflation higher were expected to sap momentum from an already slowing economy.
CBA cut its forecasts for GDP growth to 1.6 per cent in the December quarter of 2026 and 1.7 per cent in late 2027, around 0.3 and 0.2 percentage points lower than its prior projections.
The bank expects household demand to be the main drag as higher borrowing costs and dearer petrol prices squeeze discretionary spending.
Labour‑market assumptions have also been marked lower, with CBA now seeing the unemployment rate climbing to a peak of 4.6 per cent by early 2027, from a previous peak forecast of 4.4 per cent.
Yet the major bank cautioned that the conflict’s path remained highly uncertain, both geopolitically and economically.
RBA to hike in May – with risk of more
Despite weaker growth and a softer jobs outlook, CBA said it still expected the RBA to deliver another quarter‑point increase at its 4–5 May board meeting.
Yet the bank said the decision would once again be “line‑ball” given the expected downturn and rising unemployment.
For rate‑sensitive borrowers, CBA warned that a potential cash rate hike beyond the May meeting was a genuine possibility.
“There are risks of the RBA needing to lean further against inflationary forces and taking the cash rate further into restrictive territory. The risk sits with a fourth rate hike post the May meeting,” the bank said and identified three triggers that would prompt a fourth 2026 hike.
First, it said, was a federal budget that delivered “large‑scale cost‑of‑living support,” cushioning household incomes, yet adding to demand and inflation.
Second was the Fair Work Commission’s minimum and award wage decision due in June, with CBA noting that “a higher inflation environment does raise the risk of a larger increase, adding to pressure on interest rates and inflation expectations.”
The third was the real‑time behaviour of households, with the bank stating that if consumer spending failed to slow, resilience would then tilt the balance towards further tightening.
CBA said it expected the first cuts to arrive in 2027, with 25‑basis‑point moves predicted in May and August.
Westpac calls for patience and calmer heads
Westpac Group chief economist Luci Ellis broadly agreed that the conflict was a serious shock, yet urged policymakers not to overreact.
She said that while oil prices and shipping routes were under pressure, the situation was not “COVID 2.0” and did not justify emergency policy moves.
Ellis drew on guidance from New Zealand’s central bank in stressing that rate‑setters should look through the first‑round impacts of higher petrol prices on headline CPI.
Yet she conceded that “second‑round effects such as higher transport and materials costs flowing through to other prices may, however, require a response”.
For Ellis, the key question was how long the supply disruption would last and how far it could spill into broader prices and wages.
She noted that it would “pay to wait to see which scenario plays out ahead of the May meeting.”
Ellis also pushed back against the idea that the RBA should move between scheduled meetings in response to market volatility.
“In particular, we do not expect an out‑of‑cycle RBA decision,” she said and noted that “even during the GFC, there were not out‑of‑cycle policy decisions.”
With the board already divided on how quickly to tighten, she concluded that “this is not COVID, and we do not expect policymakers to act like it is.”
[Related: Inflation cools, yet banks flag CPI flare-up prompting further hikes]
