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.
What the desk is arguing
The desk believes the RBA's decision to hold rates steady through 2026 is indicative of a broader trend towards cautious monetary policy. This perspective is reinforced by Commonwealth Bank's expectation of a 4.35% cash rate being sustained, with potential cuts in 2027 contingent on inflation trends.
Supporting this view, the RBA's latest rate hike was passed with an 8-1 vote, suggesting a stronger consensus among board members compared to previous meetings. The updated inflation forecast indicates a peak of 4.8% in the June quarter, up from 4.2%, which reflects ongoing pressures from the Middle East conflict and higher energy prices.
Where it sits in our coverage
Our consensus target for AUD/USD is 1.075, with a range from 1.04 to 1.12. Firms contributing to this consensus include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan and citi, who also expect a stable RBA stance through 2026, while bofa presents a more bearish outlook, forecasting a lower target. The desk's call sits at the upper end of the consensus range, reflecting a more optimistic view on the RBA's ability to manage inflation without aggressive rate hikes.
How other firms see it
Firms like jpmorgan and citi share a similar outlook, anticipating stability in RBA rates through 2026. Conversely, bofa holds a contrary position, projecting a more significant decline in the AUD due to anticipated rate cuts.
Watch the AUD/USD trajectory closely, as it will likely reflect the RBA's monetary policy decisions and inflation data releases. Additionally, the upcoming Q2 CPI report will be critical in shaping market expectations surrounding the RBA's future actions.
Key takeaways
- 01CBA expects RBA to hold rates at 4.35% for the rest of 2026.
- 02Inflation forecasts have been revised upward, indicating potential for an August rate hike.
- 03GDP growth has been downgraded to 1.3%, suggesting a slowdown in economic activity.
- 04The market may not fully price in the risks associated with inflation surprises.
Market implications
Traders should monitor the AUD/USD level around 0.72, as this could act as a resistance point if the RBA signals a pause in rate hikes. The upcoming Q2 CPI data will be pivotal in determining the likelihood of an August rate hike.
Commonwealth Bank expects the RBA to hold rates at 4.35% for the rest of 2026 before cutting in 2027, though an August hike remains possible if Q2 trimmed mean CPI surprises to the upside. Earlier: Westpac sees upside inflation risks after RBA lifts cash rate to 4.35% in 8-1 vote AUD faces headwinds above 0.72 as RBA signals pause, TD warns Summary: The RBA lifted the cash rate 25 basis points to 4.35% in an 8-1 vote, the third consecutive hike, with inflation and inflation expectations remaining the board's primary concern, according to Commonwealth Bank of Australia CBA expects the RBA to remain on hold for the remainder of 2026, with the press conference indicating the board now has space to monitor developments, per the CBA note An August hike remains a risk, conditional on Q2 trimmed mean CPI exceeding the RBA's forecast, with key watch points including Federal and state budgets, wage outcomes and consumer spending, according to CBA The RBA's updated Statement on Monetary Policy revised headline CPI higher, with a peak of 4.8% now forecast for the June quarter, up from 4.2% previously, while trimmed mean CPI is seen peaking at 3.8%, per CBA's analysis of the SMP GDP growth was downgraded to 1.3% by year-end from a prior forecast of 1.8%, reflecting the income squeeze from the Middle East conflict and softer household consumption, according to CBA CBA's base case sees the RBA cutting the cash rate twice in 2027, with trimmed mean CPI returning to the 2.5% midpoint by the June quarter of 2028, per the note Commonwealth Bank of Australia expects the Reserve Bank to hold its cash rate steady for the remainder of 2026 following the third consecutive 25 basis point hike that lifted the official rate to 4.35% in May, though the bank cautioned that a further move in August could not be ruled out. The RBA's Monetary Policy Board voted 8-1 in favour of the May increase, a broader consensus than the 5-4 split that delivered the March hike.
CBA said the decision itself was in line with expectations, but characterised the accompanying messaging as more dovish than the rate action implied, with Governor Michele Bullock noting that three consecutive hikes left the board well placed to monitor how the economy and the Middle East conflict evolved before acting again. CBA's inflation outlook paints a challenging picture. The RBA's updated forecasts now see headline CPI peaking at 4.8% in the June quarter, up from a prior forecast of 4.2%, driven primarily by the energy shock flowing from the Middle East.
Trimmed mean inflation is seen peaking at 3.8% in the same period, with the 2.5% target midpoint not reached until mid-2028. CBA flagged upside risks to the Q2 trimmed mean figure and said a reading above the RBA's own forecast would likely be the trigger for an August hike. On growth, the bank revised its GDP forecast down to 1.3% by year-end from 1.8% previously, reflecting weaker household consumption, the income squeeze from higher fuel costs and a softening in business investment expected later in the year.
Sources & References
How we cover this story