Bendigo Bank March Economic Update

Bendigo Bank’s Chief Economist, David Robertson, covers the impact of the Middle East conflict, how high inflation and a strong jobs market are likely to spell a May cash rate hike, and breaks down what it all means for the Aussie dollar.

Conflict in the Middle East

"The US and Israeli strikes and the Iranian retaliation are adding dimension to recent volatility in financial markets," Mr Robertson said today.

"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,” Mr Robertson said.

A May cash rate hike likely

"Closer to home, 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," Mr Robertson said.

"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," Mr Roberston added.

Markets and Aussie dollar resilient…for now

"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," Mr Robertson 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," Mr Robertson concluded.