Inflation up, jobs tight: RBA handed case for triple rate hike

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RBA Governor Michele Bullock has held that inflation is too high and the board will do what is required. Picture: NewsWire / Gaye Gerard

Inflation, employment and household spending – all rising – just gave the RBA a green light to hike, with one analyst warning it needs three to catch up, which would double repayment increases.

Unemployment fell to 4.4 per cent in May – with the employed persons index at its highest point in four years – while trimmed mean inflation hit its highest level in almost two years at 3.6 per cent, and household spending rose 1.3 per cent with annual spending accelerating to 5.5 per cent compared to May 2025.

The latest CPI figures show trimmed mean moving in the wrong direction. Source: ABS, Canstar.

If the board was looking for some cover to justify not hiking, it could tease something out of hours worked falling 1.1 per cent in May and underemployment ticking up to 5.9 per cent in the Australian Bureau of Statistics data.

But the dip is a single-month blip after hours worked spiked in April in the midst of a structural uptrend. The overall employment story is strong, and it arrives after an ANZ-Roy Morgan inflation expectations survey hit a 16-year record high.

That’s well above levels sparked during 2022’s worst inflation explosion – and a result that property analyst and commentator Michael Matusik said should be treated as “a flashing red warning light” for anyone with a mortgage.

The RBA has historically increased rates when inflation expectations exceeded 5 per cent, said the Matusik Missive. The four-week moving average sits at 6.0 per cent – with Mr Matusik warning more rate hikes are inevitable.

“I think the RBA should have lifted rates in June,” he said. “If inflation expectations remain elevated and underlying inflation stays above target, then further increases in August, September and November should not be ruled out.”

An August hike alone would take the cash rate to 4.60 per cent – which Canstar data insights director Sally Tindall warned is uncharted territory for many borrowers.

“If it goes up another notch we’ll be in territory not seen since 2011, when debts were a lot lower.”

She cautioned borrowers that the June pause in hikes by the RBA “shouldn’t be mistaken for the end of the tightening cycle” because “the Board certainly hasn’t declared victory over inflation” – the central bank’s core mandate.

Inflation expectations as per the ANZ-Roy Morgan report, flagged by Michael Matusik. Source: Matusik Missive

Three rate hikes since January have already added $272 a month to repayments on a $600,000 mortgage, according to Canstar. If Mr Matusik’s three further hikes arrive across August, September and November, that figure could double – meaning a rise of around $548 a month in total since this year’s tightening cycle began.

For those on an $800,000 mortgage, that cumulative repayment increase would reach around $730 a month for 2026, and $915 extra on a $1 million loan, compared to last year’s monthly repayments.

Adding to the pressure, the federal government’s temporary fuel excise discount is being wound back – halved to 16 cents per litre from July 1, with the remaining relief removed entirely in August – arriving alongside a 4.75 per cent minimum wage increase that covers around one in five Australian workers.

Wednesday’s Australian Bureau of Statistics CPI data did nothing to appease the situation, with trimmed mean inflation – the result the RBA watches closest – rising to its highest level in almost two years at 3.6 per cent annually.

“Core inflation has risen for the second consecutive month, returning to September 2024 levels,” Ms Tindall said. “This is a disappointing result given the central bank has been fighting it for four years.”

Seasonally adjusted employment and hours worked. Source: ABS

Mr Matusik said “for most of the past decade, inflation expectations generally sat between 4 per cent and 6 per cent. They collapsed during Covid to around 3.2 per cent, before surging again. Now they have broken through every previous peak. That matters.”

“The key issue is not simply where inflation is today. It is whether households and businesses still believe inflation will return to the RBA’s target range of 2 per cent to 3 per cent.”

Of the major banks, only Westpac retains a hike forecast, with economists Neha Sharma and Sian Fenner saying Wednesday’s trimmed mean result meant they retained “our view that further cash rate increases are coming, with the next hike likely at the August meeting.”

The next RBA board meeting is scheduled for August 10 to 11, with key data points still to come – June quarter CPI on July 29 and the June monthly household spending indicator on August 4.

Canstar found around 13 per cent of big four bank home loan customers already have no repayment buffer, including offset accounts – with a small proportion falling behind on repayments.

That anxiety is showing up in consumer sentiment data with the ANZ-Roy Morgan Consumer Confidence report for the week ending June 21 finding mortgage holders were the only cohort to record a decline in confidence — even as overall consumer confidence rose 2.1 points after the RBA’s decision to hold.

Impact of a further 0.25 hike on monthly repayments. Source: Canstar

Of the big four banks, only Westpac still retains a hike forecast for this year. Picture: Jake Nowakowski

ANZ economist Sophia Angala attributed the confidence decline to the RBA retaining the option to hike rates should inflation prove more persistent.

This after RBA Governor Michele Bullock confirmed the board “does not rule out further tightening in monetary policy if that is what is required”.

Housing costs were among the largest drivers in Wednesday’s inflation data. Electricity prices surged 21.1 per cent annually following the end of government rebates, while rents rose 3.6 per cent and new dwelling costs climbed 5.6 per cent.

Food inflation also accelerated, rising from 2.8 per cent to 3.3 per cent on the back of supply chain pressures arising from the conflict in the Middle East.

Market services inflation — the measure most closely watched for signs of entrenched domestic price pressure — also edged higher to 3.8 per cent annually, driven by increases in eating out and vehicle maintenance costs.

Big four bank customers’ home loan repayment buffers. Source: Canstar

Reserve Bank of Australia’s Governor Michele Bullock says the board has not ruled out further tightening. Picture: NewsWire / Christian Gilles

That eating-out pressure is showing no sign of easing. Separate ABS data released Thursday found household spending on hotels, cafes and restaurants rose 1.9 per cent in May — driven primarily by restaurant meals, takeaway and dining out, with higher catering and hospitality prices cited as a contributor. The ABS noted transport spending was distorted by the normalisation of Middle East-related flight refunds — stripping that out, underlying household spending rose 0.6 per cent.

Despite all the signs, three of the four major banks believe the cash rate has peaked, with ANZ, NAB and CBA seeing 4.35 per cent as sufficient for the remainder of 2026.

Ms Bullock is firm on one point: “I want to be very clear that inflation remains too high”.