Encouraging signs in inflation data are positive news for the Australian economy, according to ANZ Economist Sophia Angala, but unlikely to prevent the Reserve Bank of Australia (RBA) from lifting interest rates at its May policy meeting.
Data from the Australian Bureau of Statistics showed headline inflation rose 4.1 per cent in the year to March 2026, and 1.4 per cent in the quarter. But there was better news to be found in the data on underlying inflation, Angala told ANZ Institutional Insights on video, which grew just 0.8 per cent in the quarter - below what the RBA likely had been expecting in its last forecast round in February.
“Overall, it does suggest to us that the momentum in underlying inflation is moderating,” Angala said.
That supports ANZ Research’s view that a May rate rise will be the final one in the RBA’s cycle, she said, although the central bank is likely to stay watchful.
“Given the additional price pressures coming from higher fuel costs, the RBA is likely to remain cautious around the inflation outlook,” Angala said.
“We continue to expect the RBA to increase the cash rate by 25 basis points at its May meeting, taking the cash rate to 4.35 per cent.”
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Angala said the impact of higher fuel prices on the rest of the inflation basket will be critical for where inflation goes next.
“It's not just about higher petrol prices but about how higher oil prices are flowing through to higher transport costs, or higher input costs for businesses,” she said. “And from there, how it affects the price of goods and services more broadly.
“That process does take time. We expect the impacts of that to be more evident in the inflation data from April.”
The inflation data comes at a time of falling consumer and business confidence. Angala said the environment is likely to impact consumer spending.
“Given the weakness in consumer confidence alongside higher rates and inflation, that's likely going to limit household consumption growth from here,” she said.
Business confidence is at lows not seen for six years, Angala said, which augers poorly for the investment environment.
“We expect soft business investment growth in 2026, given the impact of higher rates and also slowing consumer demand,” she said.
The next RBA meeting is scheduled for May 4 and 5.
