RBA predicts faster, more extensive cost pass-through

RBA chief economist Sarah Hunter (pictured) addressed the Bloomberg Forum for Investment Managers on 19 May, saying: “Our research suggests pass-through will be faster and more extensive, and the risk of inflation expectations drifting higher is elevated”.

“Cost pass-through may … be stronger than assumed, and higher fuel prices could lift and embed higher inflation expectations, which RBA research shows are particularly sensitive to fuel, perpetuating the inflationary shock,” Hunter added.

With US President Donald Trump holding off strikes on Iran after requests were made by Gulf leaders, the US president said he is willing to wait until early next week. In addition, NATO discussed plans to escort ships through the Strait of Hormuz if it remains closed in early July, Westpac said: “markets remained volatile as optimism over a US–Iran deal faded.”

“Oil prices eased slightly as geopolitical tensions remained unresolved, while gold declined on higher bond yields and iron ore edged lower on a softer Chinese demand outlook,” Westpac added.

Westpac found that Australian government bond yields declined as oil prices eased, with the 3-year yield down 6 basis points and the 10-year yield down 5 basis points.

“Swap markets continue to price at least one additional rate hike this year, with the implied terminal cash rate for year-end at 4.71 per cent,” Westpac added.

In light of the ABS’s unemployment figure released today, the Commonwealth Bank predicted that the employment rate would rise by 15,000 in April, the participation rate would remain at 66.8 per cent, and the unemployment rate would remain at 4.3 per cent, rounded.

“A higher interest rate outlook and an expected weaker labour market are expected to further constrain consumer spending,“ CommBank said, adding that a recovery in retail spending will likely occur in 2027 as opposed to the previously projected 2026.

“Looking ahead, it is challenging to see potential growth lifting anywhere in Australia in the near term. As states continue to bump up against their economic speed limits, inflationary pressures will persist,” Commonwealth Bank said.

Despite these challenges, Commonwealth Bank found that the ACT leads Australia with the highest potential growth rate at 3.1 per cent, followed by Queensland (2.3 per cent) and Victoria (2.2 per cent).

“Labour productivity growth is a key driver of state-level divergence. Stronger population growth in the ACT, Queensland, Victoria and WA has also supported these states’ supply capacity,” Commonwealth Bank said.

Further, the CommBank’s findings revealed that potential growth was close to the estimated national level of around 2.1 per cent for South Australia, NSW, and Western Australia, in contrast to declines in potential growth for NT (1.3 per cent) and Tasmania (1.2 per cent) over the past few years.

“Labour productivity growth is a key driver of state-level divergence. Stronger population growth in the ACT, Queensland, Victoria and WA has also supported these states’ supply capacity,” Commonwealth Bank said.

“On a smoothed basis, most states (except the NT) are currently running at or above their economic speed limits, like the national economy,” CommBank added.

CommBank said that the commencement of large investment upswings, such as Queensland’s Olympics build, SA and WA’s defence-linked pipeline and the data centre wave in NSW and Victoria, will add to demand.