RBA Forecasts Inflation Peak at 4.2% by Mid-2026 Before Gradual Easing

The Reserve Bank of Australia has revised its inflation outlook, now expecting inflation to peak in mid-2026 before gradually easing over the following two years. According to the RBA's March 2026 Chart Pack, underlying inflation is forecast to reach 3.7% and headline inflation 4.2% by mid-year, before returning toward the midpoint of the 2–3% target band by mid-2028.

Why Inflation Is Persisting

The revised forecast reflects two main drivers: supply-side shocks and robust domestic demand.

On the supply side, ongoing disruptions in the Strait of Hormuz have pushed oil prices higher, flowing through to transport costs, freight, and energy-intensive goods. These external pressures are beyond the RBA's control but are feeding into the domestic inflation pulse.

On the demand side, Australia's economy remains resilient. Consumer spending has held up despite higher interest rates, supported by a tight labour market and accumulated household savings from the pandemic era. Services inflation — driven by wages and domestic demand — remains elevated.

What This Means for Interest Rates

The RBA has signalled that interest rates will remain at restrictive levels for longer than previously expected. With inflation not forecast to return sustainably to the 2-3% band until mid-2028, rate cuts are unlikely before late 2026 at the earliest.

Markets had been pricing in cuts by mid-2026, but those expectations have now been pushed back. The cash rate currently sits at 4.35%, and most economists now expect it to remain above 4% through the end of the year.

For mortgage holders, that means continued pressure. The average household with a mortgage is now paying approximately $330 more per month compared to early 2025, according to analysis by economist Saul Eslake.

Housing and Cost of Living

Higher-for-longer interest rates are compounding cost-of-living pressures. Rent inflation remains elevated as housing supply struggles to keep pace with population growth. Grocery prices, while moderating, are still significantly higher than pre-2024 levels.

The political pressure on the Albanese government is mounting. With inflation not expected to return to target for another two years, voters are likely to face sustained cost-of-living pain through the next federal election cycle.

Global Context

Australia is not alone in facing persistent inflation. Central banks across developed economies are grappling with similar supply-demand imbalances. The U.S. Federal Reserve has signalled that its own inflation fight will extend into late 2026, while the European Central Bank is contending with energy price volatility tied to geopolitical instability.

The difference is that Australia's inflation is being driven more by domestic factors — particularly services and housing — than by imported goods. That gives the RBA less room to cut rates even if global conditions ease.

The Path Ahead

The RBA's forecast assumes no further major supply shocks and a gradual cooling in domestic demand as higher rates take effect. If those assumptions hold, inflation should ease through 2027 and 2028.

But the risks are skewed to the upside. Any further escalation in the Middle East, unexpected wage breakouts, or fiscal stimulus could delay the return to target inflation. For now, Australians should prepare for higher rates and elevated prices to persist well into 2027.