The Cash Rate's Round Trip, and the Vote Underneath It
Three cuts in 2025, three rises in 2026, and a cash rate back at 4.35 per cent. For portfolios, the level that returned matters less than what failed to return with it.
By the team at Banyantree Investment Group
This essay is adapted from analysis first shared in our Monthly Investment Letter of 30 April 2026.
Last year the Reserve Bank of Australia cut its cash rate three times. This year it has taken all three back. The third rise went through on 5 May, and the cash rate now sits at 4.35 per cent, precisely where the easing began fifteen months ago.¹
The votes are the more interesting record. The second reversal, in March, passed by a single vote, five board members to four. Seven weeks later the third passed eight to one. The dissent shrank from four votes to one between the two meetings, and the forecasts published alongside the May decision are built on a cash-rate path that keeps rising, to about 4.7 per cent by the end of the year.² A round trip that was still an argument in March had become close to a consensus by May.
Those forecasts deserve a closer read than they have generally been given, because of what sits inside them. The bank takes the path to 4.7 per cent from market pricing, as its forecasts conventionally do; it is the market's charge for money rather than a promise from the board. And the baseline it feeds is conditioned on the conflict in the Middle East resolving soon and fuel prices declining.¹ Read the combination the way a bond desk would. The scenario in which the conflict resolves and petrol retreats still carries a rising rate path, and still leaves underlying inflation above 3 per cent until the middle of next year, back at the midpoint of the band only around mid-2028, roughly two years later than the bank hoped in February.² The forecast does not need a long war to require tight money. The market path embedded in the peace scenario still rises.
Why? Because on the bank's own diagnosis, oil worsened an inflation problem that was already in progress. The May statement traces part of the pick-up to capacity pressures building through the second half of last year, before the first strike, and points to early signs of firms moving cost pressures into their prices, which is the moment dearer fuel stops being a price and starts being an expectation.¹ Central banks pause all the time; a pause is a judgement about timing, the destination standing while the schedule slips. A reversal is a different object. A bank that hands back its own easing inside fifteen months has changed its mind about which risk it fears, and the board said as much in its March post-meeting statement, which described a "material risk" that inflation would remain above target for longer than previously anticipated.¹
The questions that follow are familiar. Where does the rate top out? When do the cuts come back? How much of the assumed path actually arrives? All reasonable, all answerable in basis points, and none of them, we think, the useful one. The useful question is what kind of shock this is, because the kind decides what the central bank is for while it lasts.
Stagflation is usually defined as high inflation beside weak growth, which describes the weather and tells a portfolio nothing. Here is the operational version. In a demand shock, inflation and growth weaken together, so a bank cutting rates fights both problems with one instrument. Every piece of bad news arrives with an easing option embedded in it, which is why equities in a demand downturn tend to find a floor nobody formally promised them. In a supply shock the two variables split. Prices rise while activity slows, any move the bank makes helps one side by hurting the other, and the bank has to choose. Stagflation, for an investor, is the state in which bad news stops carrying the option. The RBA has told you which way it chooses, narrowly in March and emphatically in May.
For what it is worth, a further half a point was where our own thinking sat in the last week of April, when the public question was still whether May would deliver a third rise at all, and for the reason that matters more than the number: a board in this position keeps choosing the inflation risk over the growth support. The path the bank published days later assumed slightly more. The hierarchy is the transferable part.
Australia runs this experiment faster than almost anyone. Most Australian mortgage debt sits on variable rates or short fixed terms, so a cash-rate change reaches household repayments within weeks or a few months; through the 2022 to 2023 tightening, roughly three-quarters of a 425 basis point rise had reached the average outstanding mortgage rate by the end of the episode. In the United States, where the thirty-year fixed loan dominates, the same change can take years to touch an existing borrower.³ Which means the barrel of oil that started this reaches an Australian household twice. Once at the pump. Then again, a few mortgage statements later, once the bank has responded to what the pump did to prices.
Run it through one household, and date the charges carefully. In March, with automotive fuel up almost 33 per cent in the month, a household spending $100 a week on petrol needed about $140 more that month if it kept driving. The May rate rise adds about $125 a month to the interest on a $600,000 variable balance. Call it $265 of new monthly cost, split almost evenly between the shock and the answer to it, static and illustrative rather than anyone's actual bill.⁴ Date the earlier rises with care. The February increase predates the conflict entirely; by March, the board was answering an inflation problem already under way, with the fuel shock adding to it. The illustration uses only May's 25 points so that the whole tightening cycle is not treated as an answer to petrol, a distinction this essay will need again shortly. Now watch the two charges diverge, because the divergence is the argument in one month. By early May the petrol price had handed back much of the March spike, helped by the temporary excise cut.⁴ The rate rises did not retreat with it. The petrol bill came partly back on its own; nothing about a cash-rate decision comes back on its own, and on the assumed path the second charge grows after the first has faded. New Zealand, a few months further down the same road, shows where this leads: consumer confidence at a seventeen-month low in March, households naming fuel prices first.⁵
The reassuring reading of all this is on the record, and it deserves full strength. In March the Reserve Bank judged the financial position of most households strong: a little over 1 per cent of variable-rate owner-occupiers were estimated to have a cash-flow shortfall at the end of 2025, around 0.3 per cent combined that shortfall with thin prepayment buffers, and housing arrears had returned to roughly pre-pandemic levels. On the bank's assessment, the year's first rate rises and the dearer fuel had not materially changed most borrowers' ability to meet repayments and essentials.⁶ Those facts matter. They make a default cycle unlikely and keep losses away from bank balance sheets. What they cannot do is answer the question an equity investor is asking, because an arrears statistic answers one narrow question: did the borrower keep paying the loan. It says nothing about what the household stopped doing in order to keep paying it.
The bank's own research explains how the aggregate can look calm while the adjustment runs. A 100 basis point rise in the cash rate is estimated to lower total household disposable income by only about 0.2 per cent within a year, because borrowers' higher payments are largely offset by savers' higher interest receipts.⁶ The net number is small; the gross flows underneath it are not, and the two sides of the ledger do not spend alike. The same research carries estimates putting borrower households' response in durable-goods spending at roughly three times savers', figures the bank itself flags as dated and assumption-dependent.⁶ Money moves from the households most likely to spend it to the households least likely to, and the sum of the two movements shows up as nothing much.
So one shock writes itself into three ledgers, and the ledgers do not close together. The household budget closes first: savings fall, offset balances are drawn, the renovation or the car waits. Company accounts close second, revenue line by revenue line, at reporting dates spread across the year. Arrears close last, and only once a household has exhausted every other way of protecting the mortgage. Reading the third ledger to answer a question about the second is the category error on offer this winter. Low arrears are strong evidence about financial stability and weak evidence about earnings, because the arrears line can stay benign through the entire period in which households adjust successfully. In fairness, the earliest spending data support the calm reading: outside petrol, the bank found little sign of a material pullback by early May, while noting the weekly card data are noisy enough to hide smaller shifts.⁷ The route exists. Its scale is not yet established, and the place it will be established is the second ledger.
Nor is this an RBA story alone. The IMF's latest revisions mark growth down and inflation up across most major economies at once, the signature of a supply shock; a demand cycle moves the two together.⁸ The Federal Reserve held at the end of April with four of its twelve voters dissenting, the first four-dissent vote since October 1992, and the fight was over one sentence in the statement implying the next move would be a cut; three of the four wanted the implication gone.⁹ The Bank of Japan held the same week while halving its growth forecast for the year and lifting its inflation forecast by nearly a full point, the supply-shock signature compressed into a single document, with three members wanting to raise rates into it.⁹ The ECB held again at the end of April, judging that upside risks to inflation and downside risks to growth had both intensified.⁹ None of the majors is easing into the weakness everyone can see coming, and no board has resolved the argument toward it.
So what does the market have in the price? It depends which market you ask, and the honest answer requires opening a number rather than quoting it. The rate market, whose pricing the bank borrowed for its forecasts, carries further rises and a slow return of inflation to target. Consensus estimates compiled by Bloomberg put S&P/ASX 200 earnings per share growth for 2026 at close to 19 per cent at the end of April, down from just over 21 per cent in the middle of the month.¹⁰ Those two prices may disagree about the same economy, or they may not, because an index earnings number is a sum, not a temperature. The test is what sits inside it: how much of the growth is resources, how much is banks, how much is earned offshore; what the line looks like with resources set aside; whether revision breadth is widening or narrowing beneath a stable headline. If the support is narrow, the two markets are simply describing different parts of the index, the headline living with the miners while the typical domestic company lives in the rate market's world. If the support is broad, then equities have allowed for this shock better than the macro argument suggests, and the concern should be held more lightly. Either answer is worth having, which is the mark of a real test. The board, for what it is worth, spent part of May on the same puzzle: the minutes record members discussing why riskier assets had recovered while confidence fell and the expected path of policy rose, and whether markets were underpricing the downside.⁷
Two things complicate the reading. An oil shock lifts the earnings of the energy producers inside the index at the same moment it squeezes everyone downstream of them, so the aggregate can hold its shape on the strength of the one sector the shock is helping. The bank's May analysis supplies the first reading: since the conflict began, upgrades to Australian listed-company earnings have come principally from energy, with expectations outside energy little changed.¹⁰ And the rescue usually pencilled in at this point in an Australian argument, China, reinforces the same tilt rather than offsetting it: the early data obliges, industrial output up 6.3 per cent through January and February and infrastructure investment up 11.4 per cent, but a rebound with that investment-heavy shape arrives at the resources end of the ASX first, underneath a growth target of 4.5 to 5 per cent.¹¹ So the instrument sharpens. The revision line worth watching is the one with the whole resources complex set aside, not the energy producers alone.
The deeper unpriced item is the reflex itself. For most of two decades, a six or eight per cent correction in equities has been a self-limiting event: it tightened financial conditions, and tighter conditions summoned the easing that ended the correction. That loop needs a bank with room to answer. A correction arriving now would arrive with the trimmed mean at 3.3 per cent, above the band and unmoved for four months, headline inflation at 4.6 per cent, and short-term household expectations only weeks off a survey record, and it would be met with sympathy and a hold.¹²
One distinction matters here, because the last cycle showed there are two puts, and only one has been withdrawn. When the gilt market seized in September 2022, the Bank of England was buying bonds within days, with British inflation near ten per cent, and kept raising rates; when American regional banks cracked in March 2023, the Federal Reserve built a lending facility over a weekend, mid-tightening.¹³ The backstop that defends market plumbing is intact, and central banks will use it with inflation above target. What those episodes did not produce is the other put, the cut that arrives because growth has softened and puts a floor back under valuations. The plumbing was defended all the way through 2022 and equities still had their worst year since 2008, because the soft prints carried no cut inside them until inflation broke.¹³ That distinction is not academic this quarter; the argument the four Federal Reserve dissenters started in April was precisely about whether the statement should keep gesturing at the second kind. The dip still gets bought or it doesn't. What has changed is who is available to buy it with you.
The objection with the best pedigree has a name, and the name is Trichet. Raising rates into an oil spike is the canonical modern central-banking error. The ECB raised in July 2008 with crude near its record and was cutting within three months. It raised twice more in 2011, in April and July, with Brent above US$120 after Libya, and both rises were taken back before that December.¹⁴ On this record the seasoned position writes itself: the RBA's rises will be handed back the way Trichet's were, the same journey run in reverse, and the right response is to look through the hikes rather than reprice anything. Plenty of sophisticated money holds exactly this view, and it has a live advocate inside the building: the lone dissenter in May made the current version of the case, that the restraint already in place might prove sufficient, and that a prolonged conflict could weaken demand more sharply than the majority allowed.⁷ It deserves better than a wave of the hand.
The first answer is in the expectations record, and it has to be stated carefully, because that record cuts both ways. Short-term household expectations set a survey record in late March and remain far above anything consistent with the band even after easing; the longer-term measures the framework ultimately defends have stayed anchored.¹² Trichet's error was treating anchored expectations as fragile. This board is acting against the risk that two more years above target, which is its own forecast's timetable, work the anchor loose. That is a smaller claim than announcing the anchor broken, and a harder one to fade.
The second answer is in the bank's own documents. The fader's logic runs: the shock made the inflation, so the shock passing unmakes it, and the hikes follow it out the door. The May forecasts refuse both halves. The baseline already assumes the conflict resolves and fuel prices fall, and it still carries a rising rate path, because the diagnosis places part of the inflation in capacity pressures that predate the first strike.¹ On the bank's own arithmetic, resolution does not bring the cuts, because the conflict is not where the inflation came from. And the comparison should keep its sting even so. The board may yet be making Trichet's error, tightening into an imported shock that fades, and Australia's fast mortgage transmission means the cost of being wrong arrives quickly. The case this essay makes does not depend on the rises lasting. Earnings and valuations are set during the interval in which the board finds out whether it has gone too far, and the interval is the investable part. The 2011 fade was eventually vindicated, and the euro area travelled through a recession and a sovereign crisis before the vindication paid. Getting the destination right spared nobody the route.
None of this asks to be believed on trust; every part of it reports to public data, and the dials are worth naming. First, the expectations curve. The short end set its record in late March and had already surrendered part of it by mid-April; the long end stayed anchored throughout. A continued retreat at the short end while the long end holds is the single reading that most weakens the case above, returning the RBA to Trichet's position, fighting a ghost. A renewed climb, or movement further along the curve, would say the board's fear is arriving. Second, the distance between the headline and the trimmed mean. The trimmed mean exists to strip out exactly what the pump is doing; the headline exists to record it. In March they sat 1.3 percentage points apart, 4.6 against 3.3.¹² Second-round effects are the process by which that gap closes from below, and while the trimmed mean stays put, the pass-through the board fears remains a fear rather than a fact. Third, where households find the money: the saving rate, offset and redraw balances, and the discretionary categories, which is the first ledger reporting before the second can. Fourth, revision breadth into the August results season, read with the resources complex set aside as well as at the index level. We hold the view lightly enough to name what would retire it: expectations subsiding, the gap stable, households funding the shock out of income, and an ex-resources earnings line that holds. A reader shown that set should prefer it to this essay.
The cash rate has completed its round trip. Three cuts inside a year, three rises handing them back, and a level at the end identical to the level at the start, inside a forecast that assumes the conflict resolves and still points higher. What changed is what a soft print buys. On the way down, every weak number on jobs or spending carried a cut inside it. The same number now arrives empty-handed. Nine people argued over precisely that trade-off in March, and settled it, eight to one, in May. The arrears line will tell you whether the mortgages were paid. It will not tell you what was not bought, and the vote still outstanding is whether a market still carrying a consensus forecast of close to 19 per cent earnings growth understands the difference.
General information only. Not personal advice. Past performance is not indicative of future performance. Examples are illustrative. This material is intended for wholesale and professional investors.
Notes
1. Reserve Bank of Australia monetary policy decisions: 25 basis point increases in February and March 2026 took the cash rate from 3.60 per cent to 4.1 per cent, the first consecutive increases since mid-2023, with the March decision carried five votes to four; a further 25 basis point increase on 5 May 2026 took the cash rate to 4.35 per cent, carried eight votes to one. The three cuts of 2025, in February, May, and August, had taken the rate from 4.35 per cent to 3.60 per cent. The board's 17 March statement described a "material risk" that inflation would remain above target for longer than previously anticipated. The May statement noted early signs of firms experiencing cost pressures looking to increase prices, that short-term measures of inflation expectations had risen, that inflation had picked up materially in the second half of 2025 with part of the increase reflecting greater capacity pressures, and that the baseline forecast assumes the conflict is resolved soon and fuel prices decline.
2. Reserve Bank of Australia, Statement on Monetary Policy, May 2026: the baseline forecast sees underlying inflation peaking higher than previously expected, remaining above 3 per cent until mid-2027, and returning to the 2.5 per cent midpoint of the target band around mid-2028, with headline inflation peaking near 4.8 per cent in mid-2026. The forecasts are conditioned on a technical assumption for the cash rate, derived from market pricing in the usual way, of approximately 4.7 per cent by the end of 2026.
3. Reserve Bank of Australia published analysis of mortgage rate pass-through: the predominance of variable-rate and short fixed-term housing lending means cash-rate changes reach most outstanding mortgages within months; during the May 2022 to December 2023 tightening, the average outstanding mortgage rate rose by around 320 basis points against a 425 basis point rise in the cash rate, approximately three-quarters pass-through. The bank's subsequent household cash-flow work concluded the channel had returned to around its pre-pandemic strength as the fixed-rate share declined, while noting the uncertainty of the estimate.
4. Australian Bureau of Statistics, Monthly Consumer Price Index Indicator, March 2026: automotive fuel prices rose 32.8 per cent in the month of March, the principal driver of a 1.1 per cent monthly rise in the CPI. The household figures are static and illustrative: the petrol calculation assumes unchanged consumption at March prices, and the interest arithmetic is 0.25 per cent applied to a $600,000 balance. By early May, the Reserve Bank reported that retail petrol prices had fallen substantially from their late-March peak, partly reflecting the temporary reduction in fuel excise.
5. Westpac McDermott Miller consumer confidence survey, March 2026: New Zealand consumer confidence at a seventeen-month low, with higher fuel prices from the Middle East conflict cited as the leading pressure on household incomes.
6. Reserve Bank of Australia, Financial Stability Review, March 2026: a little over 1 per cent of variable-rate owner-occupier borrowers estimated to have a cash-flow shortfall at the end of 2025, with around 0.3 per cent combining a shortfall with low prepayment buffers; housing arrears around pre-pandemic levels; and an assessment that the first 50 basis points of 2026 increases and higher oil and gas prices had not materially changed most borrowers' capacity to meet scheduled repayments and essential expenses. Reserve Bank cash-flow channel research: a 100 basis point cash-rate increase estimated to reduce total household disposable income by around 0.2 per cent within a year, based on September 2024 balance sheets, with borrower households' marginal propensity to spend on durable goods estimated at roughly three times that of saver households; the bank noted the underlying household data are available only every four years and the estimates rely on assumptions.
7. Reserve Bank of Australia, May 2026 assessment and minutes: little evidence at that stage of a material pullback in spending outside petrol, with noisy weekly card data making smaller changes difficult to detect; the May minutes recorded low corporate bond spreads, comparatively contained expected equity volatility, sharp falls in consumer and business confidence, a materially higher expected path for policy rates, and discussion of whether markets were underpricing downside risks. The minutes also set out the minority view: that the degree of restraint already in place might prove sufficient, and that a prolonged conflict posed greater downside risk to demand than the majority allowed.
8. International Monetary Fund, World Economic Outlook revisions for 2026: growth downgraded and inflation revised higher across most major economies, reflecting the energy shock from the Middle East conflict.
9. Federal Open Market Committee, 29 April 2026: the federal funds rate held at 3.5 to 3.75 per cent with four dissents, the first four-dissent vote since October 1992; one dissenter preferred a 25 basis point cut, while three supported the hold but opposed retaining statement language implying further easing. Bank of Japan, 28 April 2026: the policy rate held at 0.75 per cent by a six to three vote, with the dissenters proposing 1.0 per cent; the fiscal 2026 growth forecast was lowered to 0.5 per cent from 1 per cent and the core inflation forecast raised to 2.8 per cent from 1.9 per cent. European Central Bank, 30 April 2026: rates held, with the Governing Council judging that upside risks to inflation and downside risks to growth had both intensified; Eurostat flash estimate for March 2026 showed euro-area CPI up 2.5 per cent year on year, the steepest acceleration since 2022.
10. Banyantree analysis of Bloomberg bottom-up consensus estimates: forecast S&P/ASX 200 earnings per share growth for 2026 of 18.8 per cent at 28 April 2026, down from 21.0 per cent at 13 April. The estimate is an aggregate index forecast and does not by itself establish the contribution from resources, banks, offshore earners, or domestically exposed companies. The Reserve Bank's May analysis found that changes in Australian listed-company earnings expectations following the conflict were led principally by energy, with expectations outside energy little changed.
11. National Bureau of Statistics of China, January to February 2026: industrial output up 6.3 per cent year on year, the fastest since September; infrastructure investment up 11.4 per cent; retail sales up 2.8 per cent, more than three times the December pace. Government work report, March 2026: a growth target range of 4.5 to 5 per cent.
12. Australian Bureau of Statistics, Monthly Consumer Price Index Indicator, March 2026: CPI up 4.6 per cent over the year, the highest annual rate since September 2023, and the trimmed mean up 3.3 per cent, unchanged for a fourth consecutive month and above the Reserve Bank's 2 to 3 per cent target range. ANZ-Roy Morgan weekly consumer inflation expectations reached a record of approximately 7.3 per cent in late March 2026, before easing through April; longer-term measures of inflation expectations remained broadly stable and near target per the Reserve Bank's May Statement on Monetary Policy.
13. Bank of England, 28 September 2022: announcement of temporary purchases of long-dated UK government bonds to restore orderly conditions in the gilt market, with UK CPI inflation near ten per cent; Bank Rate was raised again at the following meetings. Federal Reserve, 12 March 2023: announcement of the Bank Term Funding Program following the failure of Silicon Valley Bank, with the federal funds rate raised again on 22 March 2023. The S&P 500 fell approximately 19 per cent in calendar 2022, its weakest year since 2008.
14. European Central Bank decision history: the main refinancing rate raised 25 basis points to 4.25 per cent on 3 July 2008, with the first cut following on 8 October 2008; raised 25 basis points on 7 April 2011 to 1.25 per cent and again on 7 July 2011 to 1.5 per cent, with both increases reversed by cuts on 3 November and 8 December 2011. Brent crude traded above US$120 per barrel in April 2011 following the disruption of Libyan supply.
