CBA tips RBA rate hike tomorrow but warns Iran war makes it a close call. Split RBA board
At a Glance
The desk anticipates a 25 basis point rate hike from the RBA to 4.35% at the May meeting, driven by persistent inflation pressures exacerbated by the ongoing Iran conflict. However, this decision is precarious, with softening consumer sentiment and signs of economic slowdown complicating the outlook. Per the full note from Commonwealth Bank of Australia, the inflation trajectory remains concerning, with headline CPI expected to peak at 5.1%. Market expectations are currently pricing in a 75% probability of this hike, reflecting a significant shift in sentiment since the March meeting.
Key Takeaways
Full Analysis
What the desk is arguing
The desk argues that the RBA is likely to raise rates by 25 basis points to 4.35% due to inflationary pressures linked to the Iran conflict and a tight labor market. Per the full note from Commonwealth Bank, the decision is considered 'line ball' as consumer sentiment shows signs of weakening, complicating the inflation outlook.
Supporting this view, the RBA's inflation expectations have risen, with headline CPI projected to peak at 5.1% and trimmed mean CPI at 3.8%. The labor market remains tight, with unemployment at 4.3%, which adds urgency to the RBA's decision-making process.
The alternative read would suggest that the RBA might hold rates steady, given the recent softening in consumer sentiment and the trimmed mean CPI miss of 0.8% for Q1 2026, which was below expectations of 0.9%. This indicates that the economic impact of previous rate hikes is beginning to materialize, potentially giving the RBA pause before further tightening.
Where it sits in our coverage
Our consensus target for AUD/USD is 1.075, with a range of 1.04 to 1.12. Notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan, which is also anticipating a rate hike, while bofa holds a more cautious stance, suggesting a lower target. The desk's call sits at the upper end of the consensus range, reflecting a more hawkish outlook compared to some peers.
How other firms see it
Firms aligned with the desk's view include jpmorgan and citi, both forecasting a rate hike in line with the RBA's inflation concerns. In contrast, bofa expresses skepticism about the need for further tightening, citing potential economic slowdown risks.
Watch the AUD/USD trajectory as it may reflect the RBA's rate path, particularly in light of the Iran conflict's impact on energy prices and inflation expectations. The interplay between these factors will be crucial in shaping market sentiment moving forward.
Market Implications
Traders should monitor the AUD/USD level closely, particularly as it approaches 1.075, which aligns with our consensus target. The market's reaction to the RBA's decision on May 5 will be critical, especially given the current geopolitical tensions affecting energy prices.
From the original
Commonwealth Bank expects the RBA to raise rates 25bp to 4.35% in May 5, but warns the decision is line ball given Iran war inflation pressures and softening consumer sentiment. Summary: Commonwealth Bank of Australia economists forecast the RBA will raise its cash rate by 25 bas
Related speeches
4 itemsEconomic and event calendar in Asia 5 May 2026, Reserve Bank of Australia rate hlke day!
The Reserve Bank of Australia (RBA) is poised for a 25 basis point rate hike today, driven by inflationary pressures exacerbated by geopolitical tensions, particularly the ongoing conflict in Iran. Per the full note from Eamonn Sheridan at investinglive.com, this marks the RBA's third consecutive hike, reflecting a split board that is nonetheless leaning towards tightening. The market is closely watching this decision, especially given the potential for a hawkish stance from Governor Bullock regardless of the outcome, indicating a strong commitment to combat inflation. The consensus among analysts suggests a significant focus on the implications of the Hormuz Strait situation on inflation dynamics, which could influence future monetary policy.
RBA set to hike to 4.35% today. NAB sees cash rate peaking near 4.6%.
The Reserve Bank of Australia (RBA) is poised to increase its cash rate by 25 basis points to 4.35%, with National Australia Bank (NAB) projecting a terminal rate of approximately 4.6% due to persistent energy-driven inflation and robust domestic growth. Per the full note [source], this hike would effectively reverse the easing cycle initiated in 2025, reflecting the RBA's commitment to addressing inflation pressures that have intensified amid geopolitical tensions. The upcoming Statement on Monetary Policy (SOMP) is expected to revise growth forecasts downward while raising inflation expectations, indicating a complex economic landscape ahead.
CBA sees RBA on hold for rest of 2026 after third consecutive hike to 4.35%
The desk anticipates that the Reserve Bank of Australia (RBA) will maintain its cash rate at 4.35% for the remainder of 2026, with potential rate cuts beginning in 2027. This outlook is supported by Commonwealth Bank's recent analysis, which highlights inflation concerns and a downgraded GDP forecast. Per the full note [source], the RBA's decision to raise rates for the third consecutive time reflects a cautious approach to monitoring economic developments, particularly in light of inflationary pressures stemming from energy costs. The desk notes that the market's current pricing may not fully reflect the potential for an August rate hike if inflation data surprises to the upside.
May meeting, RBA set for third straight hike as Hormuz closure drives inflation surge
The Reserve Bank of Australia (RBA) is set to deliver its third consecutive rate hike on May 5, raising the cash rate by 25 basis points to 4.35%, driven by persistent inflation pressures exacerbated by the closure of the Strait of Hormuz. Per the full note [source], a recent Reuters poll indicates that over a third of economists now expect rates to exceed 4.60% by year-end, a significant shift from previous forecasts. This adjustment reflects heightened concerns over core inflation, which is now forecast to average 3.8% this year, up from 3.1% prior to the geopolitical tensions. The RBA's cautious stance is informed by its recent experience with inflation rebounding swiftly after rate cuts in 2025, prompting a more aggressive approach to monetary policy.
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