Persistent supply disruptions in the Middle East have driven up fuel costs, intensifying already elevated price pressures and keeping Australia’s inflation rate above the central bank’s 2%–3% target range. This trend is prompting policymakers to maintain a tightening monetary stance.
Data released by the Australian Bureau of Statistics on Wednesday showed that the trimmed mean consumer price index, which excludes volatile items, rose 3.5% year-on-year in the first quarter, matching economists' expectations. The Reserve Bank of Australia aims to keep inflation near the midpoint of its target band.
On a quarterly basis, the trimmed mean CPI increased by 0.8% in the first three months of the year, slightly below the anticipated 0.9%.
The Australian dollar continued to decline following the release. Market expectations for a May interest rate hike dropped from 85% before the data to 75%. Meanwhile, local stock market losses narrowed.
Although the conflict in the Middle East has pushed prices higher, Australia’s underlying inflation had already worsened before the recent energy price shock. This prompted the RBA to implement two consecutive rate hikes earlier this year in an effort to realign demand with supply.
As inflation remains stubborn, economic activity weakens, and unemployment rises, the RBA policy committee may opt for a third consecutive rate hike next week. A hike on May 5 would bring the cash rate to 4.35%, effectively reversing all of the central bank’s interest rate cuts from the previous year.
In addition to the rate decision, the RBA will also release an updated set of quarterly macroeconomic forecasts. Economists suggest these projections are likely to indicate persistent inflationary pressures in the near term, alongside a slowdown in GDP growth.
A key focus will be how the RBA balances growth and inflation risks over its extended forecast horizon. Critical questions include how long the bank expects the inflationary shock to last, whether energy price increases will meaningfully drag on economic activity, and whether the resulting spare capacity will be sufficient to bring inflation back to the target midpoint by mid-2028 as previously projected.
Treasurer Jim Chalmers recently expressed caution about the economic outlook, reiterating that the government’s fiscal blueprint will prioritize discipline while offering targeted support. The treasurer is set to deliver the budget in less than two weeks.
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