RBA’s third consecutive hike: what to expect next

The increase was before the halving of the fuel excise announced by the government, which is effective from 1 April 2026 until 30 June 2026 - The fuel excise is a federal flat tax applied to every litre of petrol and diesel to fund transport infrastructure. By reducing the cost by 26.3 cents per litre, the government engineered a mechanical drop in retail fuel prices that will be reflected in April inflation figures. This is projected to shave off about 0.4%-0.5% from the CPI inflation numbers, barring any changes in other CPI components.

Despite the fuel excise, we believe headline inflation would persist stubbornly above the RBA’s inflation target, and this is before the second-round effects that is hanging over the horizon.

Recently, Wesfarmers, which is Australia’s largest retail conglomerate that operates major hardware and department store chains nationwide, has also warned that consumer prices will inevitably rise to offset mounting input costs. Management cited heavy fuel surcharges from international shipping and domestic transport providers, alongside surging costs for petrochemical-based goods like PVC pipes and building materials. This corporate pass-through confirms that second-round effects are indeed materialising, embedding inflation deeper into the economy.

At a broader level, we will also be watching the upcoming wage price index data to be released on 13 May. If ongoing union negotiations and cost-of-living adjustments lead to sticky wage growth, we expect this to exert upwards pressure on inflation.

Table 2: Some of Australia’s more pertinent economic calendars

All eyes on next Tuesday’s Australia budget

Treasurer Jim Chalmers will be delivering 2026-2027 federal budget on 12 May, and we expect it to be a test of the government's resolve to balance inflation with the growing housing affordability crisis.

A major focal point will be the property sector, specifically whether the government introduces structural reforms to negative gearing or capital gains tax (CGT) discounts, policies widely viewed as catalysts for inflated investment property prices. Alongside housing, consumers and investors alike are closely monitoring the potential rollout of cost-of-living support, including the extension of the recent fuel excise cuts, targeted tax offsets for low-to-middle-income earners, and the reinstatement of energy bill rebates.

Any overly generous cash handouts or aggressive government spending risks artificially stimulating consumer demand, which may undermine RBA’s efforts to cool the economy.

What’s next for Australia

In our view, RBA is currently caught in a tug-of-war. On one hand, stubborn inflation suggests that interest rates will likely stay higher for a while. On the other hand, the broader economy appears to be losing momentum, with both corporate and consumer confidence weakening.

Given the current macroeconomic backdrop, we continue to favour a Barbell strategy, preferring both short (around 1-year) and longer tenors (7 to 10-years) of the yield curve.

At the short end, yields have repriced materially higher – close to 4.7%, in line with the RBA's tightening cycle. Positioning here allows investors to earn a competitive income given decent yields, bolstered by a strong AUD. At the longer end, the 7 to 10-year yields are currently nearer 5%, offering an attractive income and a meaningful carry. We also see roll-down potential in the 7-to-10-year segment, which captures the steepest portion of the sovereign curve. Investors who hold over a medium-term horizon stand to benefit from additional price appreciation as bonds “roll-down” to shorter maturities along the curve.

In the corporate credit space, we continue to favour high quality, investment grade corporate bonds, particularly names like Australian major banks, as well as regulated or essential services issuers that offer the defensive characteristics.

Table 3: Recommended bonds (within the long ends)