RBA and Inflation View: June Hold Affirmed, Increases Still Ahead

Inflationary Headwinds Signal June Rate Hold

Expectations are firming that the Reserve Bank of Australia (RBA) will keep its benchmark cash rate unchanged at the upcoming June policy meeting. This anticipated pause comes despite inflation figures remaining stubbornly above the central bank's target range. The RBA's Monetary Policy Board appears poised to maintain the current rate, allowing time to digest recent economic data that presents a mixed picture. Consumers are showing signs of strain, and the property market is subdued, contrasting sharply with persistent inflationary pressures and a significant investment surge in areas like data centers.

Recent economic indicators have provided a somewhat ambiguous signal, lending support to the argument for a temporary halt in rate hikes. This pause offers the RBA a crucial window to assess the evolving economic landscape.

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Revised Inflation Outlook and Future Hikes

New inflation forecasts suggest a slightly lower peak for headline inflation, now projected at 4.7%, down from a previous estimate of 5.0%. This adjustment is largely attributed to a downward revision in anticipated oil and fuel prices. Trimmed mean inflation, a key measure of underlying price pressures, has also been revised marginally lower for the second, third, and fourth quarters of this year, with the year-ended rate expected to peak at 3.8% instead of 4.0%.

Despite these downward revisions, the projected inflation trajectory still surpasses the RBA's own forecasts. This divergence suggests that the central bank may face an upside surprise in inflation figures. Consequently, the prevailing view is that further rate increases are probable in the August and September meetings, aligning with the RBA's stated objective of curbing inflation.

The RBA's stance suggests that subdued consumer and housing market activity will be viewed as a necessary consequence of monetary policy transmission, as long as inflation remains distant from the 2.5% target. The probability of zero or one additional hike appears more likely than three, indicating a potentially shallower overall tightening cycle if a more extended pause is implemented.

Energy Markets and Normalization Uncertainties

Regarding global energy markets, the base case for normalization in the Strait of Hormuz and broader Gulf oil supply remains largely unchanged. Current assumptions anticipate shipping volumes rising to approximately 10% of normal levels by the end of June, with full normalization not expected until mid-2027. Brent spot and dated prices in the second quarter are tracking below baseline assumptions of US$110 and US$125 respectively. This is partly due to a reduction in supply risk premiums following ceasefire developments and a less constrained crude balance than initially projected.

Stronger-than-anticipated United States exports and weaker import demand from China have provided a short-term cushion, although price volatility persists amid evolving geopolitical headlines. Price forecasts for the second through fourth quarters of 2026 have been reduced, with the most significant adjustment occurring in the third quarter. Prices could potentially dip below US$90/bbl if a deal is confirmed and shipping resumes, particularly before the gradual nature of traffic and Gulf production normalization becomes evident.

Revised forecasts for petrol and diesel prices across the second to fourth quarters of 2026 reflect this softer oil price outlook. The most substantial revisions are anticipated in the third quarter, with petrol prices expected to decrease by around 20 cents per liter and diesel by close to 100 cents per liter, averaging $2.05/l and $2.39/l respectively.

Underlying Inflationary Pressures Persist

The near-term inflation outlook has been lowered, partly counterbalanced by a stronger wages outlook feeding into market services. Headline inflation is now projected to reach 4.4% year-on-year in the second quarter and peak later at 4.7% in the fourth quarter. Trimmed mean inflation is also revised lower, anticipated to reach 3.7% in the second quarter before peaking at 3.8% and holding through the fourth quarter.

While the near-term inflation trajectory appears more moderate, the risk of secondary inflationary effects from elevated fuel costs impacting broader price categories remains. Current government measures are suppressing some of this pass-through, but with many set to expire by June's end, the full impact of higher freight costs is yet to be felt. Furthermore, increased fertilizer expenses are expected to filter through in the latter half of the year, as industry surveys indicate growers are reducing planting due to escalating input costs. Drier weather patterns, coupled with the potential for a more severe El Niño event, also pose upside risks.

Trader Takeaways

The RBA's anticipated June hold, followed by potential August and September rate hikes, presents a complex outlook for currency traders and fixed-income investors. The central bank is navigating a delicate balance between cooling inflation and supporting a fragile domestic economy. Traders should monitor upcoming inflation prints closely, particularly the trimmed mean measure, which is currently tracking above the RBA's own forecasts. The divergence between the RBA's projections and our own outlook suggests a potential for hawkish surprises from the central bank, even as domestic demand softens.

Key assets to watch include the Australian Dollar (AUD), which could see volatility depending on the RBA's forward guidance and subsequent data releases. AUD/USD may face headwinds if global risk sentiment sours, but could find support if the RBA signals a more aggressive tightening path than markets currently price in. Investors should also consider the impact on Australian government bond yields, which may creep higher if inflation proves stickier than expected, potentially widening the spread against other developed market sovereign debt. The market's pricing of future rate hikes is a critical factor; if it underprices the RBA's resolve, there's room for yields to move higher and the AUD to appreciate.