Clearly next week’s March consumer price index report will be critical in evaluating the likelihood of a further increase in the policy rate when the RBA’s Monetary Policy Board next meets on May 4-5.
As of the time of writing, the domestic bond market sees around a 75 per cent chance that the RBA will again increase the policy rate by 25 basis points to 4.35 per cent.
If pushed, I would perhaps put the probability less than that.
At this stage, most forecasts for trimmed-mean inflation are settling around 0.9 per cent (qoq), which translates to around 3.5 per cent on an annual basis.
As the NAB Economics team notes, an outcome around 3.5 per cent suggests that inflation was both too high and broad-based ahead of the Iran shock, but probably short of fuelling RBA concerns that domestic pressures were accelerating into early 2026.
Given that the RBA increased the policy rate twice through the March quarter, there is an argument that they have acted “pre-emptively” in confronting the inflation surge that pre-dated the Iran shock.
That being the case, an outcome around 3.5 per cent might not be sufficient to get the RBA over the line for a May policy rate increase.
Moreover, if we take the Governor at her word, if the closeness of the vote at the last meeting was “more about timing than direction,” that may afford some breathing space in May to allow the RBA to take on board a little more data before reconvening in mid-June to contemplate the utility of further tightening.
But it is a close call.
Going the other way was the recent Fair Work Commission decision to abolish junior pay rates for young workers, which are thought to add around 0.4 per cent to wage growth over 2027, and an upcoming minimum wage decision expected around July of this year.
The foregoing is emblematic of a particular inflation proclivity in the Australian economy.
This is the product of an almost egregious inattention of governments (both State and Federal, and Labor and Coalition) to policies that might ease structural constraints on inflation. In most instances, this involves “unintended consequences” of regulatory creep in labour and goods markets.
There are other elements that are more global in nature. In large measure, these involve the reversal of a number of structural forces suppressing inflation that were present in the three or so decades leading into the pandemic.
For example, I have in the past instanced that the globalisation of labour supply (after the fall of the Berlin Wall and the “export” of labour from large emerging market economies such as China and India) is abating. The globalisation of goods markets is in retreat as governments resort to protectionist measures (most notably with the Trump trade measures in the US); domestic regulation of goods and labour markets is increasing in scope, leading to loss of flexibility in markets and attendant upward price pressures or “sticky” inflation; and baby boomer workforce participation is declining.
In the wake of the oil shocks of the 1970s, developed country central banks’ big mistake was a premature retreat from an inflation focus. That “let the inflation genie out of the bottle” and resulted in the painful, but necessarily harsh Volcker medicine of the late 1970s / early 1980s, which saw overnight rates (fleetingly) approach 20 per cent. (Inflation – and elevated interest rates – lingered longer in Australia.)
I am not suggesting that the current circumstance is one that is anywhere near quantitatively on a par with the stagflation of the 1970s. But there are elements that are redolent of that time, albeit on a substantially reduced scale – “stagflation-lite” if you will.
There is an argument that a surge in oil prices is ultimately disinflationary. The narrative goes that the diminution in economic activity growth wrought by an oil price surge is of greater consequence than the price effects. Therefore, the bigger risk is that the economy is tipped into recession, and that would ultimately be disinflationary.
However, there is at least a question as to whether that holds to the same degree when those structural suppressants to inflation are in abeyance.
If that is true, then all central banks need to be more attuned to inflation risks now, more so than at any other time since the 1980s.
That has particular relevance in Australia given its inflation proclivity.
So even with a “pause and reflect” in May, the RBA might still need to reload later in the year, but given action in 2026 to date, a “pause and reflect” in May would not surprise.
Stephen Miller is an Investment Strategist with GSFM. The views expressed are his own and do not consider the circumstances of any investor.
