The RBA held official interest rates steady at its 16 June meeting and signaled that the current level of rates is appropriate to see inflation trend lower over the medium term. Encouragingly, the RBA is of the view that inflation is on track to decelerate towards its 2 to 3 per cent target, which is in line with its most recent forecasts from May.
The RBA highlighted reasons why inflation is likely to decelerate. Resolution to the US-Iran conflict and with that, lower oil prices, will be critical to lower global and domestic inflation. The RBA also noted a higher than forecast unemployment rate and falls in house prices in some cities will help to dampen inflation.
While the economy recorded a respectable annual growth pace of 2.5 per cent in the March quarter 2026, it is clear that the economy is slowing and growth will moderate over the rest of 2026. The tax policy changes announced in the May Budget have generated pushback from parts of the business sector and have added some uncertainty to the economy. In terms of the housing market, the tax and other reforms will discourage investor activity, but will see first home buyer activity increase.
Key data
Below is an update of key trends in the economy over the past month:
- In the March quarter, GDP growth eased to 0.3 per cent, while the annual increase was steady at 2.5 per cent. Annual growth was driven by a strong lift in private sector Capex, a rise in dwelling investment and household consumption while government demand slowed. Net exports reduced GDP growth given the import concentration of items in Capex, including equipment used in data centres.
- Annual headline inflation eased marginally in April to 4.2 per cent from 4.6 per cent in March. The trimmed mean rate edged up to 3.4 per cent from 3.3 per cent. Both results were broadly consistent with forecasts but remain well above the RBA target.
- Household spending dropped sharply in April, falling 1.1 per cent as petrol sales declined following the surge in March. Household spending rose 1.9 per cent in March. Looking through the monthly volatility and there are clear signs of a slowing in spending. Cash flow constraints from high interest rates, cost of living pressures and a softening in the labour market are factors that likely to persist and keep downward pressure on spending growth.
- Employment fell 19,000 in April after rising 18,000 in March which is consistent with a cooling in labour market conditions. The unemployment rate rose to a four and half year high of 4.5 per cent, which is 1.1 percentage points up from the cyclical low. Weak job vacancies are pointing to a further slowing in the labour market with the unemployment rate likely to track towards 4.75 to 5 per cent.
- Consumer sentiment fell in June, to revert to historical lows, with the obvious issues of high interest rates, cost of living and tax policy uncertainty at play. Consumers had a downbeat view on the outlook for house prices. Consumer sentiment matters because is it usually a leading indicator of future household spending.
- The number of dwelling building approvals on a monthly basis remains volatile. While approvals fell 3.4 per cent in April, the trend remains solid, running at an annualised rate above 210,000. While this is below the 240,000 rate needed to hit the government’s housing accord target of 1.2 million new dwellings in 5 years, there will be a substantial addition to new supply over the course of the next few years even if that target is not met.
- The NAB survey of business activity remains relatively weak, but is distinctly less pessimistic than consumer sentiment. The index of business conditions was steady at +3 points in May, while business confidence rose 11 points but remained pessimistic at -14. At the same time, the inflation indicators in the survey point to higher inflation linked to the oil price shock.
RBA monetary policy and the current market pricing for the cash rate
Rising unemployment, only moderate March quarter GDP growth, weaker house prices and inflation coming in broadly as expected has seen the market give a low probability of further rate hikes. The futures market is pricing in a low probability of one final rate hike and is starting to price in an easing cycle in 2027 and into 2028.
The RBA is content with the near term “on hold” outlook with both the RBA Governor and Deputy Governor noting recently that the earlier tightenings were starting to impact on the economy and that the Monetary Policy Board has time to consider unfolding trends for inflation and the unemployment rate.
Major central banks are poised to hike rates as the inflation pressures remain in place after the recent monetary policy easing cycles and the ongoing fall out from higher prices and reduced supply of oil. Most futures curves are pricing in around 75 to 100 basis points of rate hikes from the major central banks over the next year or so.
House prices
House prices recorded zero change at the nationwide level in May, the weakest result since January 2025. The high frequency data from Cotality points to broader house price weakness in early June.
Rising unemployment and a lift in supply (new listings) is having a negative impact on prices, issues that have been compounded by a tightening in borrowing capacity with the interest rate hikes in the first half of 2026. More recently, policy uncertainty surrounding the tax changes announced in the budget has seen investor demand weaken. Auction clearance rates have been particularly weak in the past few months.
Prices are falling in Sydney, Melbourne and Canberra while the pace of price increase is slowing in other capital cities and in the regions. The price falls have further to run, particularly if the unemployment rate continues to rise and as investors shy away from entering the market.
There has been mixed news on rents with the rental vacancy rate remaining low in most capital cities and the growth in rents is stabilising. The tax policy changes announced in the budget will discourage investors in the established dwelling market, while encouraging first home buyers to enter the market. The longer run effect on rents is unclear.
Stephen Koukoulas is Managing Director of Market Economics, having had 30 years as an economist in government, banking, financial markets and policy formulation. Stephen was Senior Economic Advisor to Prime Minister, Julia Gillard, worked in the Commonwealth Treasury and was the global head of economic research and strategy for TD Securities in London.
