RBA interest rates: Reserve Bank more confident inflation is under control after Bullock walked ‘narrow path’

The Reserve Bank is expecting inflation will remain under control for the next two years but there’s a new economic threat looming, amid a global trade shake up.

Fresh forecasts from the RBA predict core inflation — which the bank follows closely as it removes volatility — should hit 2.6 per cent by mid-year and stay there until 2027.

The prediction gave the RBA confidence to again cut the official interest rate on Tuesday, by 25 points to 3.85 per cent.

Governor Michele Bullock resisted the urge to declare the inflation dragon had been slayed and history shows there’s always a risk the monster can bounce back. Ms Bullock pointed to the strong jobs market as a potential driver of renewed inflation pressure.

But recent inflation data had been encouraging, she indicated.

Core inflation dropped to 2.9 per cent in the year to March, back in the RBA’s 2 to 3 per cent target range for the first time since late 2021.

“Inflation is now below three per cent and employment is holding up,” Governor Michele Bullock said.

“Now we’ve got inflation down, we must keep it there, while trying to maintain a healthy jobs market.”

She said it had been “essential” to slow inflation down because rising cost of living “hurts everyone”.

The RBA’s approach in the inflation fight differed significantly from other developed countries. Interest rates were not lifted as high, as the central bank sought to keep unemployment under control.

That approach — dubbed the “narrow path” — has been largely successful.

The jobless rate is still very low at just 4.1 per cent even as inflation returned slowly into the target band.

Inflation fell faster in other major countries but many were hit with increasing unemployment, the RBA has repeatedly said.

Treasurer Jim Chalmers said the RBA’s decision showed substantial progress on inflation had not come at the expense of significantly higher unemployment.

“That makes us unusual around the world,” he said.

“This is the first time since records began that we’ve got the unemployment rate in the low fours at the same time as we’ve got both measures of inflation in the target band at the same time.”

Ms Bullock joked that she would be retiring the “narrow path” analogy.

“We’re always going to be thrown off course by things,” she said, adding a warning that the trade war would slow growth and hurt the jobs market.

“The next year is going to be a really interesting time. It’s a complete different shock.”

AMP chief economist Shane Oliver said the RBA “now sees the risks to inflation as being more balanced”.

“(The central bank) also notes that wages growth has softened and weakness in demand in some sectors makes it difficult to pass on cost pressures,” Mr Oliver said.

“But the RBA also continues to note that the labour market remains tight and productivity growth has not improved, which along with the US tariff pauses likely explains why the RBA did not see the need for a super-sized 0.5 per cent rate cut.”

EY chief economist Cherelle Murphy said the bank’s “immediate concerns have shifted to new global uncertainties”, while Saxo chief investment strategist Charu Chanana said the RBA had been “weighed down by a cocktail of global and domestic uncertainties”.

“Uncertainty’ featured prominently in the statement—not just about geopolitics and trade, but also about how domestic demand, wages, and firm pricing behaviour will evolve from here,” she said.

The bank sounded “increasingly uneasy”, Ms Chanana said.