Economist says tightening is moving faster than forecast, with more pain ahead for mortgage holders
Australia's cash rate is set to rise again to 4.6% before the year is out, according to Bendigo Bank, following the RBA's third consecutive rate increase in 2026.
The latest hike returns the cash rate to 4.35%, erasing all reductions made during last year's easing cycle.
The bank warned the pace of tightening has outstripped earlier forecasts, with the Middle East conflict continuing to drive inflationary pressure through disrupted global oil supply.
"Albeit at a faster pace than originally forecast, we can expect another hike to 4.6% later in the year," said David Robertson (pictured right), chief economist at Bendigo Bank.
"While this is a remarkable U-turn from just six months ago, rising inflation has clearly been exacerbated by the Middle East war, which is compounding pressures that had already emerged ahead of the historic disruption to the global oil supply.
"There's no doubt three rate hikes on top of higher petrol costs will be a stern test for our economy. The pace of tightening has run much faster than our more conservative forecasts from earlier in the year, and only time will tell if the RBA's aggressive approach is rewarded by containing inflation more quickly without pushing the economy into recession."
Sentiment and spending under pressure
Consumer and business confidence have declined following the previous two rate increases and elevated energy prices. Robertson cautioned that household spending and business investment are likely to contract in the months ahead.
"The blunt tool of monetary policy will slow the economy down further," he said. "Consumer sentiment and business confidence has taken a dive due to the previous two hikes and high energy prices, so household consumption and business investment will slow markedly in the coming months.
"It will also test labour markets, with the unemployment rate still relatively low around 4.25%, but the RBA is forecasting an ambitious increase from here to no higher than 4.5% over 18 months."
Middle East conflict the key variable
Robertson described Australia's economic trajectory as heavily dependent on how the conflict in the Middle East unfolds, with the Strait of Hormuz remaining a critical chokepoint for oil shipping.
"Australia remains entirely at the mercy of the duration of the Middle East conflict, which remains uncertain, with a range of scenarios being contemplated," Robertson said.
"Financial markets are still assuming a quick resolution, but the number of ships getting through the Strait of Hormuz is yet to increase. Attempts by US forces to escort ships through the Strait have been mixed, with the best benchmark of success being the price of oil, which is still expected to peak in the short term.
"Our forecast still leans to recovery in the second half of 2026, accelerating in 2027 as tech investment drives the next cycle. But, until oil prices normalise, recession risks still remain elevated."
Federal Budget in focus
With the federal budget due next week, Robertson highlighted the competing demands facing the government — supporting households, containing inflation, and lifting productivity — without the benefit of fiscal flexibility.
"Looking ahead to next week, the Federal Budget will be unveiled," he said. "The government faces the task of supporting Australian households without adding to inflation, while simultaneously needing to improve productivity in our economy – all in a fiscally responsible manner. This will be quite the challenge."
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