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- General Research Insights
The RBA Observer
- After hiking its cash rate at each of the past three meetings, we expect the RBA to be firmly on hold in June
- Although inflation is still too high, growth has already slowed and timely indicators suggest a sharper weakening to come
- We see the hiking phase as done and an extended pause as likely: we now expect cuts from Q3 2027 (previously on hold)
Expect a hold in June: cuts now expected in H2 2027
Inflation is still too high and is set to rise further before it falls. That being said, the Reserve Bank of Australia (RBA) has already taken significant action to deal with this surge in inflation – and, critically, the action is working.
Growth has already slowed and there are strong indications in a range of timely measures that growth is set to weaken further yet. In addition to the shock from the RBA’s hikes, the economy has also been hit by the Middle East conflict and, more recently, the shock from the significant shifts in tax policy in the Federal budget.
Trimmed mean inflation is too high
but growth is weakening
This combination has seen surveyed business and consumer confidence fall sharply in recent months, to be around the low levels reached in previous economic downturns. The fall in consumer sentiment aligns with a solid decline in consumer spending in April. Employment also fell in April and the unemployment rate jumped to a four-year high. More recently, auction clearance rates have fallen to the lowest levels in six years and national housing prices have declined too.
and likely to weaken further
with household spending falling
After sluggish GDP growth of only 0.3% q-o-q in Q1, which was weaker than expected, the indicators above suggest that growth is likely to have weakened further in Q2. Our central case is that GDP will fall in Q2.
For the RBA, the key to getting inflation back down sustainably to target is that aggregate demand moves back in line with aggregate supply, which we expect will require a period where growth in aggregate demand is weaker than growth in aggregate supply. Put another way, we expect that a negative output gap will be needed to get inflation back to target.
A recent sharp fall in measured capacity utilisation, to 81.9% in May, which is its lowest level in 14 months, suggests the economy is heading towards a negative output gap.
We expect the RBA to be on hold in June. Although there is some risk the RBA might choose to hike again beyond that, we expect the weakening in growth to convince them to be on hold. With economy set to weaken, and inflation expected to decline through late 2026 and 2027, we now see cuts beginning from Q3 2027.
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