‘An insurance hike’: Australia’s biggest bank issues grim economic forecast

• Commonwealth Bank of Australia has cut its forecast for growth by mid-2027 to 1 per cent, down from 1.8 per cent.
• The bank now expects unemployment to peak at 5.1 per cent at the end of 2027, up from its earlier forecast of 4.8 per cent.
• “The RBA will be on edge,” the bank said, warning more rate rises may be needed in 2027.

The Commonwealth Bank of Australia (CBA) has marked down its forecast for the nation’s economy, tipping higher unemployment, weaker growth and a central bank “on edge” as inflation eases only slowly.

In a forecast update released on Monday, the bank’s economists said Australia was set for a “sharper, longer slowdown,” with growth falling to 1 per cent by mid-2027 and unemployment peaking at 5.1 per cent at the end of 2027.

The bank had previously forecast 1.8 per cent growth and a 4.8 per cent unemployment peak, and it now expects growth to return to its 2 per cent trend only in the second half of 2028, a year later than it thought.

For households, CBA’s forecasts mean slower wage growth and a weaker job market through 2027, with the Reserve Bank of Australia (RBA) expected to lift rates for a fifth time this year.

“The RBA will be on edge, and the risk remains the need for further tightening of monetary policy in 2027,” CBA’s economists wrote.

All of the big four banks tip a rise, as previously reported by The Money Edition, with Westpac warning last week that a follow-up hike “cannot be ruled out.”

Why the outlook has soured

CBA said the escalating Middle East conflict had pushed Brent crude up more than 50 per cent since its July update.

The artificial intelligence boom has also added to inflation through data centre construction and chip shortages.

Productivity growth remains “almost non-existent,” the bank said.

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CBA expects business investment to hold up, helped by the data centre and renewables boom.

The forecasts assume oil prices return to more normal levels in 2027 and population growth slows without overcorrecting.

“Households will bear the brunt of the needed slowdown in economic activity,” CBA economists wrote.

The bank expects annual growth in household spending to slow from 1.8 per cent in the June quarter to a low of 0.7 per cent next year.

It said its internal data shows households under increasing pressure, including from higher fuel prices.

Unemployment, now at 4.7 per cent, is forecast to still be at 4.9 per cent at the end of 2028, with annual wage growth slowing from 3.3 per cent at the end of this year to 3 per cent at the end of 2027.

Home prices have fallen 8 per cent from their peak across the capital cities, CBA said, and it expects the fall to exceed 9 per cent.

Headline inflation hit 4.3 per cent in the year to September, while the quarterly trimmed mean, the underlying inflation measure the RBA watches closely, ran at an annual 3.7 per cent.

The bank expects the trimmed mean to stay at 3.5 per cent or higher until mid-2027, and to fall below 3 per cent only in early 2028, around six months later than previously thought.

Market services inflation slowed to 0.2 per cent a month in September, a tentative sign rate hikes are starting to work, CBA said.

The economists described Tuesday’s expected move as “an insurance hike,” and said it could leave monetary policy at its tightest in more than 25 years, by CBA’s estimates.

CBA assumes the cash rate will hold at 4.85 per cent after that, and has kept rate cuts pencilled in for August and November 2027, though their timing is highly uncertain.

“We see high uncertainty over the timing of these cuts given the shifts in the backdrop,” the economists wrote.