Oil-market disruption and domestic capacity constraints remain in focus ahead of the decision
Bendigo Bank’s chief economist, David Robertson, expects the Reserve Bank of Australia (RBA) to keep the cash rate unchanged at its May monetary policy meeting, while warning that the path beyond May could still include further tightening later in 2026.
In the bank’s monthly economic update, Robertson said uncertainty linked to the war in the Middle East, along with recent ABS data and shifts in confidence indicators, would frame the lead-up to the meeting.
“We predict a hold in May, but with a likely third hike for 2026 in August,” the economist said. “All of this makes for a fascinating, but challenging environment, for the federal budget in which fiscal policy will be in focus on 12 May.”
Robertson said the RBA has already increased rates twice this year, marking a sharp move from market expectations last August that rates would fall below 3%.
He pointed out that the earlier shift, before the Middle East conflict, was driven by stronger labour market outcomes and a rebound in business investment, but that the data also pointed to capacity constraints.
Robertson said policymakers would need to decide in early May whether the oil shock and associated disruption would push supply and demand “dangerously out of kilter”, or whether they could look through some of the data without increasing recession risk.
Turning to geopolitical developments, Robertson noted that markets had responded positively to the US announcement of a two-week ceasefire with Iran, but that the key issue for Australia remained the timing of a full reopening of the Strait of Hormuz.
He said that, until then, oil prices would remain elevated and a range of industrial and commercial products would also face disruption. He cited recent strikes on Qatar’s LNG facilities, adding that supply of by-products such as helium and fertilisers would be restricted even when shipping resumes.
Robertson said the inflation impact in Australia was being felt through petrol and diesel prices, despite the government’s fuel excise announcement and state-based measures including free public transport.
“All energy crises come with the risk of stagflation - the unwelcome combination of inflation and a slowing economy, bordering on recession, so this event carries the same risks, depending on its duration,” he stated.
“Globally, financial markets remain on the back foot with most stock indices around the world, including the ASX200, down around 6-8% from their record highs just over a month ago. While a pullback or even a short bear market has been widely expected given the size of the rally, its extent appears at the mercy of how quickly supply chains can normalise.
“Until then, downgrades to global growth are likely to be seen, prior to returning to a world where technology investment, especially in AI, has been the main driver of optimism in growth, asset values and productivity.”
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