Australian Inflation Moves Into RBA Target Zone, Supporting Rate Cut Outlook

Australian Inflation Moves Into RBA Target Zone, Supporting Rate Cut Outlook

Australia’s latest monthly inflation data for May reinforces the Reserve Bank of Australia’s (RBA) policy stance, with consumer price growth easing to 2.1% year-on-year—the lower boundary of the RBA’s official 2–3% inflation target.

Inflation Trends Support Dovish Shift

Even though the monthly CPI update reflects only part of the total price index, it serves as a valuable early signal ahead of the full quarterly inflation report. The May reading provides a clear rationale for the RBA’s May 20 interest rate cut, and sets the stage for another potential reduction at the upcoming 8 July meeting.

“Inflation has now reached the lower limit of the RBA’s target range, post-rationalizing the central bank’s recent interest rate cut.”

Service Inflation Falls Sharply

One of the more encouraging indicators is the sharp drop in service price inflation, down to 3.29% YoY, its lowest level in three years. Given persistent tightness in Australia’s labor market, this figure is particularly important for policymakers.

While some of the decline may be attributed to volatile components such as package holiday pricing, the overall direction is in line with RBA expectations.

Trimmed Mean CPI Drops to 2.4%

Another key measure, the trimmed mean CPI, which strips out extreme price movements, also declined to 2.4% YoY, the lowest level since late 2021. This reinforces the broader disinflation trend and bolsters expectations for another RBA rate cut in July.

Market Has Priced In the Next Move

Despite the dovish shift in inflation data, the Australian Dollar (AUD) is unlikely to react strongly. Markets have already fully priced in the next rate cut, limiting further downside for the AUD unless unexpected economic shocks occur.

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