Commonwealth Bank warns Treasurer Jim Chalmers on May Budget splurge that could deliver fourth RBA hike

Economists at Australia’s largest lender have warned the Albanese Government against any big-spending surprises in the May Budget that could deliver even more pain for already stretched households. In an updated economic forecast, the Commonwealth Bank said the US and Israel’s military incursion into the Middle East almost four weeks ago had forced it to slash its growth projections and lift inflation and unemployment expectations. Inflation was already running hot before the Australian Bureau of Statistics reported on Wednesday that it eased to 3.7 per cent in the year to February, before the start of the Middle East conflict. CBA’s research note released on Friday said surging fuel prices and inflation that remains well outside the Reserve Bank’s preferred range of between 2 and 3 per cent would result in a back-to-back third hike in official interest rates to 4.35 per cent when the board meets again in May. But it warned a fourth increase in 2026 was possible, assuming a prolonged Middle East conflict, but also “heavily dependent” on Treasurer Jim Chalmers’ fiscal policies to come out of the Federal Budget on May 12. “Assuming the war continues, and petrol prices remain elevated, it will be more difficult to deliver large budget cuts and there will be very strong political pressure to instead provide cost of living relief,” the note said. “Expansionary fiscal policy including large-scale cost of living support for households would raise the risk of the RBA needing to hike again. The economy needs to slow, households will play a key role here. “Additional fiscal support raises the risk we do not see constraint and the RBA will need to raise the cash rate to lean against inflation.” Dr Chalmers has previously argued it was private sector activity that was fuelling inflation — not public sector spending. That defence came unstuck after the year’s first interest rate rise in February when RBA governor Michele Bullock told a parliamentary hearing that government spending was driving up inflation. Ms Bullock agreed that the highest government spending in four decades, outside emergency measures during the COVID pandemic, had pushed up inflation by increasing demand for goods and services. Even without further inflationary pressure from any Budget measures to reduce the double whammy of two rate rises so far this year and weeks of price pain at the pump, CBA is tipping headline inflation will rocket to 5.4 per cent for the year to the end of June — up a staggering 1.4 per cent on its previous forecast. Unemployment will jump to 4.6 per cent by early 2027 and gross domestic product will ease to 1.6 per cent by the end of 2026 and only improve to 1.7 per cent by the end of 2027 — both slightly down on previous forecasts. In more bad new for motorists, CBA also expects the drawn-out war will keep the price of Brent crude at about $US120 a barrel until June before it falls back to $US80/a over the third quarter of calendar 2026. The bank conceded “there remains considerable uncertainty over the forecast profile” but suggested relief could still be some time away. “Both headline and trimmed mean inflation are expected to be lower than our previous forecast over H2 2027 reflecting softer economic and labour market conditions,” it said. “A lift in the unemployment rate and a slowdown in growth will help trimmed mean CPI edge down in 2027. In this environment we see the RBA cutting the cash rate twice over 2027.” CBA’s revised forecasts come the same day big four rival ANZ also upped its inflation expectations — but to a more restrained 4.9 per cent in the June quarter.