Rates to move higher as inflation refuses to play ball in Australia

Inflation is back and the Reserve Bank of Australia is springing into action. Capacity constraints, administered prices and tradable goods and services are all pushing underlying inflation higher. Like many (including the RBA), we were caught off guard by the speed at which price pressures built. In turn, we’ve lifted our inflation outlook, with trimmed mean inflation now expected to hit 3.7% in Q2, up from our previous forecast of 3.3%. That will push the RBA to hike again in May – if not earlier.

• Returning price pressures come as the labour market tightens. Unemployment stayed at 4.1% in January, below our and the RBA’s expectations. This is the latest in a string of lower-than-expected prints. In response to that trend, we anticipate more short-term resilience, pushing back unemployment’s peak in our latest baseline from mid-2026 to mid-2027.

• Higher inflation and interest rates will drag GDP growth down a fraction this year relative to our January forecasts. But lower unemployment and a sturdy building pipeline will cap the downgrade at just 0.1 ppt.

• Business investment has accelerated on the back of a surge in data-centre construction, transport projects and utilities. As work starts on the Brisbane 2032 Olympics, non-residential buildings will get another nudge higher. Meanwhile, strong population growth and a chronic undersupply of dwellings will support residential building. As for property prices, higher interest rates and affordability constraints will see momentum fade in the second half of the year, leaving price growth solid but not rocketing.

Download the full report to know more.