A tumultuous month ahead for the economy and policy makers

A series of economic policy decisions will be made over the next few weeks that will change the lives of many Australians.

Reserve Bank of Australia Monetary Policy Committee (RBA) will meet on May 4 and 5 and will announce its decision regarding the interest rate decision in the afternoon of the second day of the meeting.

A week later, on the evening of May 12, the Treasurer Jim Chalmers He will stand up in the House of Representatives and present the fifth budget of the Government of Albania. This will include a range of decisions on taxation, spending, subsidies and wider reform measures. This will undoubtedly include a range of measures to counter the effects of the oil price shock.

RBA decisions

Following interest rate hikes in February and March, the RBA raised interest rates. cash rate level something rarely seen in the last two decades. Interest rates have only been this high in the 14 years since 2012, at 4.1% in the 15-month period from November 2023 to February 2025.

So interest rates are already considered high.

Current expectations for the May meeting are heading towards a 4.35% interest rate increase, but it is not yet certain whether the interest rate increase will occur.

The most obvious problem is inflation. Global oil shock will increase increase inflationHowever, it should also be emphasized that it will also reduce the speed of economic growth. These will be the main impacts on RBA negotiations. If inflation were the only target, an interest rate increase would be certain.

What is sometimes overlooked is the RBA’s other role: full employment.

Even before the oil shock hit the Australian economy, economic growth was slowing, fueling a softer labor market. March labor force data released last week showed that the unemployment rate was 4.3%. It has been broadly stable near this level for over a year now, and more importantly, this seems consistent with some slack in the markets. labor marketGiven that wage growth has slowed and job postings have fallen sharply over the past two years.

There is no doubt that the unemployment rate will increase as the shock in oil prices affects spending, investment and employment.

Further increase in unemployment will further reduce inflation.

RBA’s interest rate decision in May is as follows: latest data This suggests a collapse in consumer confidence and intensifying negativity in the business sector. The RBA would be wise to take notice of this news.

For “inflation first” advocates, higher interest rates seem obvious. For those concerned about the cost of adding a few hundred thousand people to the unemployed, interest rates will remain steady, although it is accepted that inflation will be slightly higher for some time.

Budget decisions

Budget decisions are more complex and have a more lasting impact on society and the economy.

Treasurer Chalmers has the unenviable task of creating a series of frameworks. policy decisions often meet conflicting goals. These include helping households and business sectors cope with the effects of the oil shock, implementing taxes and other reforms to increase productivity, and ensuring that the profitability of the budget shifts towards balance.

The Budget has the opportunity to further address issues of intergenerational inequality, particularly in housing and pensions, and to restructure the National Disability Insurance Scheme (NDIS) to ensure better targeting of funding. It’s difficult to speculate on potential policy decisions as the government is still considering many of the details it will announce in three weeks.

Indeed, decisions need to be taken in the few weeks before the Budget is signed, as rapidly developing events in the Middle East impact the bottom line.

Even after interest rate and Budget decisions are announced, the unknown development of events in the Middle East (and elsewhere) will remain a potentially volatile issue that will impact the economy in the second half of 2026. Further decisions on interest rate and Budget will emerge during the remainder of 2026.

While interest rate and Budget announcements will be critical to the state of the economy over the next few years, as the pace at which geopolitical and other issues move and the magnitude of those movements are still likely to be particularly large, what the RBA and Government do in adjusting their economic policy tools may be superseded by something affecting the global economy.

Stephen Koukoulas is one of Australia’s most respected economists, the former chief economist of Citibank and senior economic advisor to the Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.

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