Goldman Sachs: Expects RBA to Raise Rates by Another 25bp to 4.60% in June

Overview

This research report interprets the statements made by Reserve Bank of Australia (RBA) Governor Bullock following the latest monetary policy meeting, along with Goldman Sachs' assessment of subsequent monetary policy. The core conclusion is that the RBA's policy focus has completely shifted to addressing upside inflation risks rather than downside growth risks. Based on this, Goldman Sachs predicts that before the current tightening cycle ends, the RBA will implement one more 25-basis-point rate hike, bringing the policy rate to 4.60%, and leans towards believing this hike will occur in June. Although tightening is still required in the short term, the firm judges that as financial conditions continue to tighten and supply-side conditions improve, a rate-cutting cycle is likely to begin in the first half of 2027.

Core views

The wording used by RBA Governor Bullock during the post-meeting press conference demonstrates a strong determination to combat inflation. In her brief opening remarks, she mentioned the word 'inflation' as many as 19 times, compared to only 2 mentions of 'growth,' and characterized risks as still skewed to the upside, including inflation expectations. She explicitly pointed out that inflation was already too high before the outbreak of the Middle East conflict, and the latest data confirms that part of the inflation stems from economy-wide capacity pressures, particularly continued tightness in the labor market. Many firms facing cost pressures are seeking to raise prices, and second-round effects could lead to higher and more persistent inflation, thereby requiring more monetary tightening to control. Regarding the future interest rate path, Bullock stated that the first three rate hikes provided the committee with 'space to observe the evolution of the war, prices, and employment.' She acknowledged that a third hike might not have been necessary absent the oil price shock, but emphasized that when inflation is already too high and the economy faces capacity pressures, additional spending makes returning to target more difficult. Regarding the restrictiveness of financial conditions, she judged that the current cash rate is at a 'slightly restrictive' level, but also noted that credit growth is stronger than average and that the restrictiveness at 4.35% is not as strong as it was in the same period of 2024. Furthermore, she explicitly stated that fuel shortages are not the current baseline expectation. Goldman Sachs' views are broadly consistent with the RBA's macro forecasts, namely that trimmed mean inflation will remain significantly above target until the second half of 2027, the output gap will be positive (approximately 1% of GDP), and the unemployment rate will remain significantly below the estimated NAIRU until the second half of 2027. However, Goldman Sachs is more optimistic than the RBA regarding productivity and the supply side, believing that underlying inflation and domestic demand growth will fall below the RBA's forecasts in Q4 2026, creating conditions for an easing cycle in the first half of 2027. It is worth noting that the RBA's forecasts are calibrated based on the assumptions that the policy rate rises to 4.7% and that the 'Strait of Hormuz reopens soon.'

Analysis framework

The institution's analytical approach primarily revolves around 'decoding central bank communication' and 'comparing macro scenarios.' First, by quantifying the frequency of keywords in the Governor's speech (such as 'inflation' vs. 'growth'), it captures marginal changes in policy priorities; this is the most direct text analysis method for interpreting central bank intent. Second, it benchmarks Goldman Sachs' internal macro model against the RBA's official forecasts item by item (inflation path, output gap, unemployment rate, financial conditions) to identify points of consensus and divergence between the two parties. Specifically, regarding supply-side and productivity assumptions, the institution introduces parameters more optimistic than those of the central bank to derive the conclusion that 'the peak of tightening will occur earlier than the path implied by the central bank.' Finally, it incorporates external geopolitical variables (oil prices, Strait of Hormuz) as key constraints to assess the asymmetry of monetary policy responses under different scenarios.

Methodology notes

• Event Gaming and Behavioral FinanceExpectation Gap/Expectation Management

  Text Analysis and Signal Release of Central Bank Officials' Public Speeches

  By statistically analyzing the frequency and context of specific keywords (such as 'inflation' and 'growth') in the central bank governor's press conference, one can judge the true ranking of policy priorities and market communication intent. This method captures marginal attitude changes more effectively than simply looking at interest rate decisions.

• Macroeconomic framework

  NAIRU and Non-Accelerating Inflation Rate of Unemployment

  NAIRU refers to the lowest level of unemployment that does not cause inflation to accelerate. The research report uses it as a key anchor to judge whether the labor market is overheating and whether further tightening is needed; when the actual unemployment rate remains persistently below NAIRU, it typically implies an increased risk of a wage-price spiral.

• Industry/Sector Analysis FrameworkSupply and Demand Framework

  Output Gap and Transmission of Capacity Pressures

  By analyzing a positive output gap (where actual output exceeds potential output) and the degree of labor market tightness, one can determine whether the economy faces widespread production capacity bottlenecks. This supply-side pressure is the core mechanism leading to cost-push inflation and second-round effects, and it serves as a critical basis for the central bank's decision on whether additional tightening is required.

Key data

• Expected Target Level for Next Rate Hike4.60%Goldman Sachs' forecast for the terminal rate of this tightening cycle
• Probability of Rate Hike in June60%Goldman Sachs' prediction for the timing of the next 25bp rate hike
• Number of Times Governor Mentioned 'Inflation'19 timesFrequency of emphasizing inflation risks in the opening remarks of the post-meeting press conference
• Number of Times Governor Mentioned 'Growth'2 timesIn comparison, expressions of concern regarding growth were extremely rare
• RBA Implied Peak Interest Rate Assumption4.7%Interest rate path assumption relied upon for calibrating RBA macro forecasts
• Scale of Positive Output GapApprox. 1% of GDPDegree of economic overheating predicted by the RBA

Impact & implications

The research report argues that the RBA's clear hawkish signals imply that the market's pricing of 'early rate cuts' may be too aggressive. Against the backdrop of upside inflation risks, monetary policy will remain restrictive in the short term to suppress second-round effects, even if oil prices decline. For asset allocation, this means AUD-denominated assets will continue to face pressure from high interest rates in the short term, while the repair of the yield curve in the bond market may need to wait until easing expectations truly materialize in the first half of 2027. Meanwhile, a series of data releases before June (the Budget, CPI, and National Accounts) will serve as a key window to validate Goldman Sachs' judgment of a 'June rate hike'; any surprises could alter the path.

Risks

• Oil price trends deviate from baseline assumptions, leading to inflationary pressures exceeding expectations or easing unexpectedly
• Fiscal settings in the Federal Budget on May 12 may have unexpected impacts on demand
• If labor market and CPI data are significantly weaker than expected, it could lead to a postponement of the rate hike timing
• The reopening of the Strait of Hormuz occurs later than expected, extending the duration of the supply shock

What to watch

• Price trends of crude oil and related commodities
• Evolution of fiscal policy settings in the Federal Budget on May 12
• Signals released in subsequent speeches by RBA officials
• Update on labor market data on May 21
• Release of CPI data on May 27
• Update on National Accounts data on June 3