But strong mortgage buffers will shield households from worst economic shocks
Australia’s largest lender Commonwealth Bank has gone bearish on the Australian economy amid ongoing conflict in the Middle East.
The bank has upwardly revised its inflation expectations while simultaneously downgrading its outlook for economic growth. CBA also expects unemployment to shoot up more than previously expected.
It is becoming increasingly clear that joint US-Israel attacks on Iran, which have had a domino effect across the entire Middle East region, are far from the quick in-out exercise promised.
“In our central case, this conflict still has some time to run, and the Strait of Hormuz is unlikely to re‑open quickly, despite ongoing reports of US‑Iran talks,” said CBA economists, including head of Australian economics Belinda Allen.
Iran has effectively cut off the Strait of Hormuz – where a fifth of global oil supply passes – causing fuel prices to soar across Australia.
Oil price shocks to continue
Under a baseline scenario of a drawn-out conflict, the Brent oil price is assumed to sit around US$120 ($174) a barrel until June 2026, before easing back towards US$80 ($116) over the September quarter and then stabilising. That sustained period of elevated energy prices is expected to filter through fuel, transport, freight, packaging and a wide range of industrial inputs.
In this central case, Australia’s GDP growth is forecast to slow to around 1.6% year-on-year by Q4 2026 and 1.7% by Q4 2027 – around 0.2-0.3 percentage points lower than previous projections.
The unemployment rate is now expected to drift up to about 4.6% by early 2027, meaning the labour market will no longer be exerting strong upward pressure on wages.
Headline CPI inflation is now expected to peak at about 5.4% year-on-year in Q2 2026, compared with a pre-war forecast peak of around 4%. Underlying (trimmed mean) inflation is also revised higher, to a peak of about 3.8% in Q2 2026, versus 3.4% previously.
Both measures are then expected to moderate through 2027 as growth slows, the labour market cools and the global shock fades, with trimmed mean inflation easing back towards the RBA’s 2–3% target band by the end of 2027.
Read more: Business confidence hits lowest point since late-2024
Retail fuel prices have already risen sharply and are expected to move a little higher as crude climbs towards US$120. That alone is expected to deliver a sizable near-term lift to the CPI, with fuel’s roughly 3% weighting in the basket doing a lot of the work.
But this is not just about the bowser. Energy is an essential input into transport, logistics, plastics, chemicals, fertilisers, industrial metals and semiconductors. Disruptions in and around the Strait of Hormuz are already pushing up costs across these supply chains and raising the risk of further shortages. Businesses are starting to pass higher input costs through to final prices and, the longer they expect the shock to last, the faster and more broadly they are likely to re‑price.
Compared with the spike following Russia’s invasion of Ukraine, the current shock is expected to be somewhat smaller overall: non‑oil energy prices such as coal and LNG have so far reacted less aggressively, and COVID-era supply constraints are no longer as acute. Even so, the memory of the last bout of supply disruption is fresh, which could accelerate pass‑through this time around.
More RBA hikes to come
Against this backdrop, the Reserve Bank of Australia (RBA) has already pivoted back into inflation‑fighting mode, delivering back‑to‑back rate hikes over the past two months.
CBA expects another hike in May, especially if the next trimmed mean inflation print lands near 0.9% quarter on quarter or higher.
From there, the outlook is more finely balanced. A fourth increase in the cash rate later in 2026 is possible, particularly if:
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The Federal Budget outcomes boost demand rather than dampening it
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The Fair Work Commission delivers a larger‑than‑expected lift in minimum wages
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Consumer spending fails to slow as projected, despite higher rates and weaker real income growth
On the other hand, the RBA Board was split 5-4 at its March decision, underlining how seriously some members are weighing downside risks to growth and employment. If activity deteriorates faster than expected, CBA reckons that could rein in the Board hawks.
Households under pressure, but buffers still matter
Higher inflation and a higher‑for‑longer cash rate are expected to weigh heavily on households. Real disposable income growth is projected to be close to flat in late 2026, significantly weaker than previously expected. That will cap consumption growth, particularly for discretionary spending.
Households are, however, entering this period with solid financial buffers. Many borrowers did not fully reduce their mortgage repayments when rates were cut in 2025, which should soften the cashflow hit from the latest increases.
History suggests households will initially lean on these buffers – by lowering saving rates – to smooth spending before eventually cutting back more sharply as uncertainty persists.
Read more: Mortgage markets at mercy of Middle East conflict
Housing prices and dwelling investment are also expected to cool further over 2026–27 on the back of higher interest rates, slower population growth and potential tax changes, adding to the drag on household wealth and broader activity.
“How the conflict will evolve and its impact on the global economy is highly uncertain,” said CBA. “The conflict could be much more severe than expected, or ease quite quickly. Similarly, how resilient global sentiment is in the face of the shock is unpredictable.”
