Aussie homeowners face a high risk of another interest rate hike despite a shock dip in inflation – with the Reserve Bank stuck between a ‘rock and a hard place’, leading economists warn.
The surprise fall in inflation to 3.8 per cent reduces pressure on the Reserve Bank of Australia to hit homeowners with another immediate hike to the benchmark cash rate as it battles to control price pressures across the economy.
But Australia’s sticky inflation problem means the relief is expected to be short-lived.
“Core inflation remains stubborn and well above the RBA’s target band,” KPMG chief economist Dr Brendan Rynne said, warning the risk of an August rate hike remained ‘high’.
“The RBA is between a rock and a hard place. The economy is not in great shape and uncertainty driven by global and domestic factors is elevated yet it seems inevitable that further rate rises may be necessary to bring inflation back inside the RBA’s target range within a reasonable time frame.”
The annual headline inflation rate dipped to 3.8 per cent in the 12 months to June and the trimmed mean measure, which strips out volatile items, held steady at 3.6 per cent.
Across the June quarter, which takes in April, May and June, the trimmed mean edged up to 3.6 per cent from 3.5 per cent in the prior quarter.
That was below the market forecast of 3.7 per cent and well below the RBA’s expectation of a 3.8 per cent acceleration.
However, inflation is still well above the RBA’s target band of 2-3 per cent and the markets expect the RBA to hike rates for a fourth time to take the rate to 4.6 per cent at some point before March 2027.
The central bank delivers its next decision on whether to hike or hold the cash rate on August 11. Money market traders lowered the odds of an August interest rate rise to just 4 per cent, down from 20 per cent, after the data inflation release.
Deloitte Access Economics partner Stephen Smith warned the numbers would keep the Reserve Bank on “high alert”.
“Falling oil prices and the government’s temporary fuel excise cuts took the heat out of the price of imported goods, but price pressures in the service economy that are not necessarily linked to the Middle East conflict picked up, suggesting that homegrown inflationary pressures are yet to be tamed,” he said.
VanEck head of investments and capital markets Russel Chesler, meanwhile, said inflation was now “entrenched”.
“It is looking like a pipe dream that it will come back within the RBA’s target band by the end of 2027,” he said, adding that July’s fuel price shock, the lift in award and minimum wages and a resilient labour market could generate higher inflation prints across the second half of the year.
Oxford Economics Australia head of economic research Harry Cruise predicted the RBA would likely “hold” rates at 4.35 per cent next month.
“While annual trimmed mean inflation rose, it increased by less than markets expected,” he said.
“All that backs up our view that the RBA will keep rates on hold next month. Underlying inflation is not just resisting pressure to rise. In quarterly terms, it is continuing to ease.”
RBA Governor Michele Bullock has flagged more rate pain could hit home soon.
In a hawkish speech on Tuesday, she stated bluntly that out-of-control inflation was at risk of becoming embedded and the RBA would “increase the cash rate further” if needed.
“The further inflation moves from target, and the more embedded it becomes, the harder it is to reverse. Credibility is hard-won and easily lost,” she said.
“The Board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed.”
She also warned that “putting off” rate hikes could lead to higher interest rates and unemployment over time, referencing Australia’s experience of stagflation in the 1970s and recession in the 1980s.
But IG senior analyst Tony Sycamore said the cooler inflation print would likely stop an August rate hike.
“The Australian rates market is now pricing in just 1 basis points of rate hikes for the RBA’s August Board meeting, extending the decline from last week when 10bp was priced in after the stronger jobs report,” he said.
“Looking further out, 12bp of RBA hikes are priced for the remainder of 2026, down from a full 25bp hike for November priced last week.”
Westpac chief economist Luci Ellis said the RBA would hold rates for the remainder of the year, reversing an earlier forecast of hikes.
“Inflation has been more benign than we feared and the RBA forecast,” she said.
In June, the largest contributor to annual inflation was housing, the ABS said, which jumped 6.8 per cent from a surge in electricity costs.
“Electricity remains one of the biggest contributors to annual inflation, with costs 22.4 per cent higher than 12 months ago,” ABS head of price statistics Rachael McCririck said.
“This is largely because government rebates which reduced household electricity bills have ended.
“Annual inflation for new dwellings has reached its highest level in almost three years, at 5.8 per cent. This was driven by builders passing on higher material and labour costs.”
The next biggest contributors were food and alcoholic beverages and recreation and culture, both lifting 3.3 per cent.
Zyft consumer finance expert Joel Gibson said there was “no breathing room” for millions of Aussie households.
“There has been no respite, no breathing room, and the national belt-tightening exercise hasn’t stopped,” he said.
“Following three consecutive RBA rate hikes earlier this year, Australian families are dealing with an unrelenting, compounding cost-of-living squeeze hitting mortgage repayments, insurance, energy bills, fuel and supermarket trolleys all at once.
“For Aussies doing it hard week after week, the biggest drivers of annual inflation over the past 12 months continue to be the absolute non-negotiables – housing and essential goods.”
Inflation pressures are also rising on the back of a second eruption of violence in the Middle East, shutting off the crucial Strait of Hormuz shipping lane and triggering a fresh surge in energy prices.
BNY APAC macro strategist Wee Khoon Chong warned that inflation remained “sticky”.
“Overall, the data reinforce the view that inflation remains sticky, rather than signalling a decisive disinflation trend,” he said.
“Combined with a resilient labour market and a buoyant equity market, the Australian economy remains on a solid footing. This should support the RBA’s hawkish bias, although the data are not strong enough to justify a resumption of rate hikes.”
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