Bendigo Bank May Economic Update

In May’s Economic Update, Bendigo Bank Chief Economist, David Robertson delves into the third; but likely not final; rate hike for homeowners this year, what it means for consumer sentiment and the implications of the ongoing developments in the Middle East here at home.

Another hike for Aussie homeowners

“The third RBA policy meeting for 2026 delivered the third consecutive rate hike, taking us back to a cash rate of 4.35% and unwinding all of 2025’s easing cycle,” Mr Robertson said today.

“Albeit at a faster pace than originally forecast, we can expect another hike to 4.6% later in the year.

“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,” Mr Robertson said.

Consumer and business sentiment falling

“The blunt tool of monetary policy will slow the economy down further,” Mr Robertson 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,” Mr Robertson said.

Implications of the ongoing conflict in the Middle East

“Australia remains entirely at the mercy of the duration of the Middle East conflict, which remains uncertain, with a range of scenarios being contemplated,” Mr 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,” Mr Robertson said.

A challenging Federal Budget

“Looking ahead to next week, the Federal Budget will be unveiled. 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,” Mr Robertson concluded.