Australia’s preferred measure of underlying inflation rose to a two-year high in the June quarter but came in below expectations, sharply reducing the likelihood of another Reserve Bank of Australia(RBA) interest rate hike in August.
Annual trimmed mean inflation increased to 3.6% in the June quarter, up from 3.5% in the March quarter but below the 3.7% forecast by economists and the RBA’s own projection of 3.8%.
On a quarterly basis, trimmed mean inflation rose 0.8%, compared with market expectations for a 0.9% increase.
Headline inflation eased to 3.8% in the year to June from 4.0% in May, also undershooting the 4.0% consensus forecast.
The softer-than-expected figures prompted financial markets to further unwind expectations of an imminent rate increase, supporting Australian equities while weighing on the Australian dollar and government bond yields.
August rate hike largely priced out
IG market analyst Tony Sycamore said the inflation update had effectively sealed the case for the RBA to leave the cash rate unchanged at 4.35% at its August meeting.
The Australian rates market is now pricing in only around one basis point of tightening for August, down from 10 basis points following the recent stronger-than-expected employment report.
Markets are pricing approximately 12 basis points of rate increases for the remainder of 2026, compared with expectations last week for a full 25-basis-point rise by November.
The reassessment follows comments from RBA governor Michele Bullock acknowledging weakness in housing and employment conditions while declining to explicitly describe the August meeting as “live”.
The softer inflation result is expected to support the S&P/ASX 200 as the benchmark looks to continue its recent rally and retest the record high of 9,202.9 reached in late February.
The Australian dollar weakened following the release, with IG forecasting the AUD/USD exchange rate could move towards its 200-day moving average near US$0.6904 and potentially the late-June low of US$0.6863.
Underlying pressures remain elevated
Despite the weaker headline result, economists warned that inflation remained sticky and continued to sit above the RBA’s 2% to 3% target range.
Pitcher Partners chief investment officer Cameron Curko said lower transport, clothing and household goods prices contributed to the monthly decline in headline inflation.
“Headline consumer inflation fell slightly by 0.1% in June, with the annual increase also decelerating to 3.8% for the year to June, down from 4% for the year to May,” Curko said.
“A drop-off in transport costs, as well as sales activity related to clothing and accessories and household appliances and furniture, were notable drivers of the monthly decline.”
However, Curko said lower fuel costs were likely to prove temporary because higher fuel excise charges would flow through in coming months.
He also pointed to persistent services inflation, which rose 4% over the year and offset some of the moderation in goods inflation, which stood at 3.5%.
“The fact remains that we are seeing insufficient signs of inflationary pressures easing, and calls will continue to be maintained for the board to be more proactive given limited expectations for action on the fiscal policy front,” Curko said.
RBA expected to remain on hold
Capital Economics said the RBA was unlikely to feel an urgent need to lift rates in the near term following the weaker quarterly trimmed mean result.
Senior Asia-Pacific economist Abhijit Surya said the data would probably prompt the central bank to keep rates unchanged in August.
However, the monthly inflation series indicated that price pressures could prove more persistent than the RBA expected.
Trimmed mean inflation rose 0.3% in June and, if maintained, could produce a quarterly increase of around 1% during the September quarter.
Surya said the RBA’s forecast for annual trimmed mean inflation to fall to 3.5% by the end of 2026 would require quarterly underlying inflation to average around 0.8% during the second half.
“The softer-than-expected quarterly trimmed mean inflation print will probably prompt the RBA to leave rates on hold at its upcoming meeting in August,” Surya said.
“But with cost pressures still elevated and the energy crisis far from resolved, the board will probably reiterate that it will do what it considers necessary to achieve price stability, including increasing the cash rate target if necessary.”
Inflation picture remains mixed
BNY APAC macro strategist Wee Khoon Chong said the June inflation data sent mixed signals, with headline inflation easing while underlying price growth remained unchanged at 3.6%.
Housing remained the largest contributor to inflation and continued to represent a central concern for the RBA.
Chong said the figures reinforced the view that inflation remained sticky rather than providing evidence of a decisive disinflationary trend.
A resilient labour market and buoyant equity market also suggested the Australian economy remained on relatively solid footing, supporting the RBA’s hawkish bias even though the latest figures were not strong enough to justify another rate increase.
Front-end bond yields and the Australian dollar fell after the release, although Chong said BNY did not believe the data were sufficient to push the RBA towards a materially more dovish stance.
The bank maintained a constructive outlook for the Australian dollar, arguing that persistent inflation and underlying economic resilience could continue to support the currency beyond the market’s initial reaction.