Inflation eases, experts split on next RBA move

Australia's annual inflation rate eased slightly to 4.2% in the 12 months to April 2026, down from 4.6% annual inflation to March, though persistent cost pressures across the housing and energy continued to weigh on households, according to the Australian Bureau of Statistics (ABS).

ABS head of prices and statistics Sue-Ellen said housing remained the largest contributor to annual inflation, rising 6.3% over the year, followed by transport costs, which increased 6.6%, easing from an 8.9% rise in March, electricity prices grew 22.5% higher compared to a year ago following the expiry of Commonwealth and state government rebates, while rents and new dwelling construction also continued to drive housing inflation higher.

Underlying inflationary pressures also remained elevated. Trimmed mean annual inflation closely watched by the Reserve Bank of Australia (RBA) as a measure of underlying price growth, edged up to 3.4% in the 12 months to April 2026, up from 3.3% in the 12 months to March 2026.

The ABS noted automotive fuel was excluded from the trimmed mean calculation in both March and April after significant prince swings linked to geopolitical tensions and changes to fuel excise arrangements.

Automotive fuel prices fell 7.0 per cent from March to April, following the halving of the fuel excise on 1 April, although prices remain 23.5 per cent higher than they were before the escalation of conflict in the Middle East.

Convera head of market insights Steven Dooley said the data shows inflation is easing slowly but remains persistent, with underlying pressures still rising.

Dooley noted this creates a dilemma for the RBA as inflation risks become entrenched.

"This is impacting growth as well, and we are seeing it globally. The manufacturing sector is holding on because services activity is collapsing as higher prices hit consumers," Dooley said.

"That is the main difficulty facing the RBA. Having already lifted its official interest rate three times this year to 4.35%, the board has to weigh a real risk that inflation becomes entrenched against equally real evidence that households and businesses are already under significant strain."

He adds that globally, weaker services activity signals slowing growth, while Australia's divergence from other economies, which are cutting rates, is supporting the Australian dollar, now at a multi-year high.

"The broader takeaway is that Australia is now genuinely out of step with the global rate cycle. That divergence offers some support for the currency but creates a real headwind for domestic earnings and household balance sheets. How well businesses adapt to that gap will define the second half of 2026," he said.

Wee Khoon Chong, APAC macro strategist at BNY Australia said they expect the RBA to hold rates in June, while maintaining a hawkish bias, with markets pricing one more hike and risks tilted toward further tightening.

Similarly, Deloitte Access Economics partner Stephen Smith also expects the RBA to hold rates in June, as recent labour market data shows a softening economy, with rising unemployment and weaker hiring. However, Smith added that an August rate hike remains likely if inflation proves stubborn.

"With growth already weak and the RBA's latest forecasts subdued, the Monetary Policy Board will be mindful that tighter policy could do more damage to activity than is needed to bring inflation back under control," Smith said.

"That said, the RBA must also be true to its mandate. If inflation does not moderate, or if energy-driven price rises become embedded in expectations and wage-setting, the board will need to act.

"Fiscal policy adds to that challenge. The latest Federal Budget puts additional money into the economy next financial year, meaning monetary policy may have to work harder if inflation remains stubborn."

In contrast, VanEck head of investments and capital markets, Russel Chesler said the RBA is unlikely to hike rates in June, as current inflation trends and softer unemployment are already factored in, though one more increase later in the year remains possible.

"We do not expect the lift in trimmed mean inflation to be enough for the RBA to move again in June. Much of the recent inflation pressure has already been built into its expectations, and with softer April unemployment numbers, we do not see a strong case for another increase in the near term," Chesler said.

"Our view remains that the terminal rate for this hiking cycle is either the current cash rate of 4.35%, or possibly 4.6% if the RBA delivers one more hike later this year."