Australia’s inflation falls to 3.8 per cent leading to big four banks seeing no more rate hikes in 2026

Australia’s inflation pace has moderated to pre-Iran war levels with economists at the big four banks now all declaring the end of rate hikes in 2026.

The consumer price index grew by 3.8 per cent in the year to June, down from 4 per cent in May, to be at the weakest level since February before the US strikes on Iran led to a blockade in the Strait of Hormuz that pushed up crude oil prices.

Westpac chief economist Luci Ellis is now no longer expecting the Reserve Bank to raise interest rates in August and September, which would have taken the RBA cash rate to an 18-year high of 4.85 per cent.

This shift means every big four bank sees no more rate increases this year on top of the February, March and May hikes, with cuts unanimously predicted next year to the existing 4.35 per cent cash rate.

“We no longer expect rate hikes by the RBA this year,” Dr Ellis said.

“Inflation has been more benign than we feared and the RBA forecast.

“The substantial pass-through of higher energy costs seen in the early phase of the Middle East conflict has not been followed up in recent months. This is welcome – we took no pleasure in our prior hawkish view.”

Futures market pricing for an August 11 rate hike plunged to just 3 per cent, down from 20 per cent, following the release of new Australian Bureau of Statistics data.

Treasurer Jim Chalmers noted the 3.8 per cent CPI was much lower than Reserve Bank forecasts of 4.8 per cent for June 2026 and Treasury Budget predictions of 5 per cent.

“This means that inflation has come in lower than expected, lower than forecast in the Budget or by the Reserve Bank,” he said.

“This is the third consecutive month where annual headline inflation has moderated.

“It’s an encouraging outcome that shows we’ve made progress on inflation since the Budget, even in the face of intense global uncertainty.”

Nonetheless, the annual pace of headline inflation has now been above the Reserve Bank of Australia’s 2-3 per cent target for the 11th straight month, and a minority of hawkish economists are still expecting rate hikes in 2026.

The RBA’s preferred underlying measure of inflation without volatile price items was still also high at 3.6 per cent and has also consistently been above the Reserve Bank band since August last year.

This meant an August rate hike was still a possibility, which would take the RBA cash rate to a 15-year high of 4.6 per cent, despite market pricing falling for an increase next month, KPMG chief economist Brendan Rynne said.

“Core inflation remains stubborn and well above the RBA’s target band,” he said.

“The RBA is between a rock and a hard place. The economy is not in great shape and uncertainty driven by global and domestic factors is elevated yet it seems inevitable that further rate rises may be necessary to bring inflation back inside the RBA’s target range within a reasonable time frame.”

Deloitte Access Economics partner Stephen Smith said a 2026 rate hike was still a possibility, even if it didn’t occur in August.

“In other words, falling oil prices and the government’s temporary fuel excise cuts took the heat out of the price of imported goods,” he said.

“But price pressures in the service economy that are not necessarily linked to the Middle East conflict picked up, suggesting that home-grown inflationary pressures are yet to be tamed.”

Housing costs climbed by 6.8 per cent during the last financial year ahead of education on 4.8 per cent as overall services inflation went up by 4 per cent.

Goods inflation increased by a more moderate 3.5 per cent but clothing and footwear costs rose by 4.9 per cent.

The Australian Bureau of Statistics data was taken in June before the Federal Government’s fuel tax relief was halved from 32 cents a litre to 16 cents a litre in July and extended until August 2.

As a result, automotive fuel prices fell 7.3 per cent over the year with average unleaded prices at just $1.51 a litre at the end of June compared with $1.73 for diesel, based on Australian Competition and Consumer Commission price monitoring data.

The data was released on Wednesday, a day after Reserve Bank of Australia governor Michele Bullock hinted another rate rise may be needed as weak productivity growth added to inflationary pressures.

Shadow treasurer Tim Wilson said Labor’s high spending was fuelling inflation and risked sparking another interest rate hike.

“Yesterday the Reserve Bank Governor directly linked government spending to inflation, and this data confirms the Albanese government’s spending addiction risks higher interest rates,” he said.

Ms Bullock on Tuesday confirmed that government spending was adding to overall demand in the economy.

“So, I refrain from offering advice on that, but mechanically you’re right. It’s part of aggregate demand and that’s another way to bring aggregate demand, what do you spend less on, that’s for governments,” she told an Anika Foundation lunch.