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Inflation outlook 2026
Much like last year we can still confidently predict that inflation in Australia will be higher 12 months from now. How much higher is the real question.
In the short term (March – May) we may see the trimmed mean and CPI readings of inflation ease. This is due to the nature of the measuring basket that puts a high emphasis on dwelling costs and energy prices don’t move at this time of the year. We are then forecasting that the RBA will wait to see the May Federal Budget and any actions taken at state levels (particularly in Victoria) before once again giving consideration to adjusting monetary policy.
The recent AUD strength may keep the RBA on hold. The stronger AUD may help keep prices down in the June quarter as the currency has now strengthened over 12% on a trade weighted basis over the past 12 months. But we must note here that inflation in the December quarter occurred despite a 10% currency appreciation over the previous 12 months.
By September we expect that wages growth will be accelerating again (Unions already pushing for inflation linked increases and further restrictions on business operations) and that energy price increases will be driving all prices higher.
Yield curve forecasts
Assuming that the short end of the curve remains anchored at 3.85% with the RBA not adjusting rates until the end of the year, then the 90day BBSW rate should remain near 3.90%. This will keep floating rate running yields supported at a higher level than seen over the past 6 months.
There may be a rally at the long end of the curve because the 5–10-year part of the benchmark curve is trading at a sizable premium to the US curve. This is something we have seen before. When the ALP was first elected in 2022 the premium of the Australian 10-year over the US 10 year blew out to 75bps. It is currently at 60bps when historically it has traded in a 15bps range either side of the US 10-year yield. We would not be surprised to see the premium shrink to 30bps in the short term. At the 5-year level it is hard to see any logic to the Australian 5-year trading at 65bps premium to the US 5 year.
