Australian inflation in the second quarter of 2026 was lower than economists' expectations, causing a notable shift in market sentiment regarding future interest rate hikes by the Reserve Bank of Australia (RBA). The crucial trimmed mean measure of core Consumer Price Index (CPI), which excludes volatile items like fuel, registered 3.8%. This figure was below initial forecasts, which were clustering around 3.7%-3.8%, with some analysts anticipating 3.9% or higher. Overall, the headline inflation for June was 4.0% year-on-year, while the trimmed-mean inflation reached 3.6% in May, both still above the RBA's 2%-3% target range.
Following the inflation data release, traders dramatically cut their bets on an August rate hike. The Australian interest rate market is now pricing in just 5 basis points (bp) of hikes for the August meeting, with a full 25 bp hike not fully anticipated until March 2027. This marks a significant dovish repricing compared to the preceding week, when the market had been pricing in a 10 bp hike for August and a full 25 bp move in November. The RBA had maintained a hawkish bias, with Governor Michele Bullock stating the Board was prepared to increase the cash rate further if needed, but her recent speeches also acknowledged moderating demand growth and a softer housing market.
The lower-than-expected inflation figures are seen as a critical factor. The market had been closely watching the Q2 CPI, particularly the core inflation measure, to see if it would clear the 3.8% threshold that Governor Bullock had indicated would push the RBA toward further action. With the figure at 3.8%, rather than above, it provides the RBA with flexibility to await the full impact of previous rate hikes. This disinflationary trend has also been supported by falling oil prices, which dropped another 0.9% to $US87.56 a barrel, further easing inflation expectations. The ASX 200 responded positively, climbing 53.8 points, with consumer-facing sectors leading the gains.
