Bank economist outlines risks for rates, growth and the Australian dollar as conflict and jobs data shape the outlook
Rising geopolitical risks and persistent inflation are sharpening the case for a cash rate increase in May, with implications for funding costs, markets and the Australian dollar.
Bendigo Bank chief economist David Robertson (pictured top) warned that the escalation of conflict in the Middle East was feeding through to energy markets and financial volatility.
“The US and Israeli strikes and the Iranian retaliation are adding dimension to recent volatility in financial markets,” Robertson said. “The global macro and market implications of the attacks depend primarily on how long the conflict lasts, and crucially, on how long the Strait of Hormuz remains closed, this being a vital artery for global energy flows.
“The price of oil was already rising ahead of the weekend’s military strikes, but rose a further 20% as events became more complex this week, reaffirming fears that a prolonged conflict could see further upside risks to energy prices.
“Though Australia is a net energy exporter, the prospect of these likely higher oil and commodity prices does add to inflationary risks for us. As a rule of thumb, a 5% permanent increase in oil adds around 0.1% to CPI, but it does also dampen sentiment and demand- so global stagflation risks are back.”
Inflation and jobs point towards May cash rate rise
Robertson said the domestic inflation backdrop left the Reserve Bank of Australia (RBA) with limited room to look through further price pressures.
“January CPI was still uncomfortably high at 3.8% with the core trimmed mean at 3.4%, so further inflationary pressures come at a difficult time,” he stated. “The latest jobs data makes May the most likely timing for the next cash rate rise in 2026 but confirms we are likely heading into a drawn-out tightening cycle, into 2027.
“Unemployment fell to 4.1% in trend terms in January, and recent RBA comments on labour markets have noted that conditions are stronger than expected, adding to capacity pressures.
“Australia not only has a lower unemployment rate than our peers, but we are the only country in the group with lower unemployment today than at the start of the decade. While this is certainly a healthy sign of strong demand, an improvement in productivity will be needed to avoid this translating to further cost-of-living pressures for Australians.
“The next two jobs reports, out on March 19 and April 16, will therefore be important for the May RBA cash rate decision, assuming they remain on hold in March.”
A rate increase in May would mark the start of what Robertson described as a “drawn-out tightening cycle” extending into 2027, suggesting a longer period of elevated borrowing costs for home owners and investors, and a more challenging environment for debt serviceability assessments.
Markets and Australian dollar hold up amid uncertainty
Despite the combination of geopolitical risks, trade tensions and the prospect of higher policy rates, equity and currency markets have so far remained relatively stable, Robertson noted.
“Despite the prospect of slightly higher cash rates, fresh trade uncertainty via tariffs, and the latest military conflicts, stock markets have only given up a fraction of the gains seen over the last 12 months - although there are a range of scenarios ahead that may see a deeper correction,” he said.
“How sustainable this upswing is will again be dependent on the extent and length of the Middle East conflict, and the associated disruptions to global trade and energy. Similarly, FX and bond markets will likely be tested by these events with global growth forecast to be around 3.3% this year, but a lasting conflict could see downgrades to this view.
“For now, the Aussie Dollar remains resilient, holding above 69.5 US cents. Some safe-haven buying of the US Dollar may see a further retracement, but with global bond markets under pressure, it remains a good time to be AAA credit-rated.”
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