Inflation tracks to forecast, opening door for RBA rate cut in May

Australia’s inflation is easing in line with expectations, strengthening the case for the Reserve Bank of Australia to begin cutting interest rates as early as May, according to CreditorWatch Chief Economist Ivan Colhoun.

Data released this week showed the core Consumer Price Index (CPI) rose 0.7% in the March quarter, meeting the RBA’s forecast and bringing the annual rate to 2.9%—squarely within the central bank’s 2–3% target band for the first time since late 2021.

“The result gives the Board confidence that inflation is on track to return to target,” Colhoun said, noting that back-to-back quarterly increases of 0.6% and 0.7% now annualise near the mid-point of the RBA’s goal. This, he added, supports a 25-basis-point rate cut to 3.85% at the bank’s next policy meeting on 19–20 May.

Global Uncertainty Adds Complexity

While domestic inflation data builds a case for modest monetary easing, global risks may complicate the RBA’s path forward. Ongoing trade tensions and new tariffs—particularly from the U.S.—pose a threat to global growth and could undermine Australia’s economy. If conditions deteriorate sharply, the RBA may opt for steeper cuts later in the year.

Still, the Board is expected to remain cautious in the near term. With unemployment at historically low levels, policymakers have room to act gradually while preserving labour market strength.

Despite slowing inflation, cost-of-living pressures remain elevated. Headline CPI climbed 0.9% in the quarter, largely driven by a 16.3% jump in electricity prices following the rollback of subsidies. While new home prices edged lower and rental inflation showed signs of easing, other essentials like insurance continued to rise—albeit at a slower pace.

Colhoun stressed that easing inflation doesn’t mean prices are falling. “Households and businesses are still grappling with high costs,” he said, adding that sustained financial pressure is contributing to elevated insolvency levels.

If tariff risks ease and inflation stays on track, markets expect another 50 to 75 basis points in rate cuts through 2025. But if global shocks escalate, the RBA may be forced to act more aggressively.

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