We have revised our view of the outlook for RBA policy, adding two further hikes to the near-term profile and pushing out the eventual reversal. We now expect 25bp rate hikes at the 16 June and 11 August decisions, in addition to the 25bp hike we already expected at the May meeting. The peak for the cash rate is now expected to be 4.85%.
This shift reflects the longer disruption to and slower recovery in fuel supply assumed in the revised baseline forecasts we first published on Friday afternoon, with the Strait of Hormuz essentially closed for eight weeks and traffic recovering only slowly after that. It also reflects the surprisingly rapid pass-through of higher fuel and other oil-derived product prices into other prices in Australia. We believe the RBA will respond to this pricing behaviour by tightening monetary policy by more than would have been needed absent that pass-through.
The halving of fuel excise, announced by National Cabinet today, reduces the near-term outlook for headline CPI inflation, but a peak of 5.4%yr in June quarter remains likely. The announcement also does not affect prices of other oil-related products, including aviation fuel and various plastics, or any price increases from damage to gas and other production facilities in non-combatant Gulf states. Much of the second-round pass-through of prices is therefore likely to remain in place, and we continue to expect trimmed mean inflation to peak around 4%yr later this year.
The higher cash rate profile will weigh on Australia’s economic outlook. Growth will be slower, especially consumption, and the labour market will be softer. We expect unemployment to peak around 5%, somewhat higher than the 4.7% peak we flagged last week. Headline inflation will dip below 2½% by mid 2027 and will remain in the lower half of the 2–3% target range through to 2028. Trimmed mean inflation will take a little longer to decline, but will be back in the target range in 2028.
A companion note, also to be released this afternoon, fleshes out the rest of the forecasts. The revisions incorporate the assumed longer closure of the Strait of Hormuz and other supply disruptions in the Middle East flagged last week. In addition, we have updated for the new profile for the cash rate, the changes to fuel excise and some other recent events.
Despite the weaker economic outlook and potential undershoot of the inflation target implied by these revised forecasts, we think the RBA will be slow to reverse this policy tightening and risks getting behind the curve in coming years. We push out the date for rate cuts and pencil in four rate cuts, one per quarter in February, May, August and November 2028. We have low conviction about the exact timing.

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