Good news for mortgage holders: Australia’s inflation rate has finally dropped back into the Reserve Bank of Australia’s (RBA) target range – a milestone that could all but lock in a May cash rate cut. 

"Trimmed mean annual inflation was 2.9% in the March quarter, down from 3.3% in the December quarter," Australian Bureau of Statistics acting head of prices statistics Leigh Merrington said.

"This is the lowest annual trimmed mean inflation rate since the December 2021 quarter."

Interest rates are the RBA’s key tool to manage inflation.

With inflation easing, it appears to be shifting its focus from curbing price growth to supporting economic activity – and that's good news for borrowers.

The RBA board meets on 19 May and is expected to announce a second rate cut the following day, on the back of the bank's February cut.

Its previous cut marked the end of an aggressive tightening cycle that had pushed mortgage rates to a 12-year high.

Most experts forecast a 25 basis point cash rate reduction for May, lowering the cash rate from 4.10% to 3.85%, though NAB continues to tip a larger 50 basis point cut, lowering the rate to 3.60%.

For the average owner-occupier mortgage ($666,000 as of December, assuming a 6% interest rate), a 25 basis point cut could slash monthly repayments by more than $100 – double that for a 50 basis point move.

A second rate cut could also further boost home values, as seen after the RBA’s February decision.

And with both major parties pledging support for first home buyers ahead of Saturday’s federal election, the property market could soon face renewed demand pressures.

Underlying inflation falls to 2.9% in March quarter

Australia’s underlying inflation rate tumbled to 2.9% over the year to the March quarter – within the RBA’s 2%–3% target.

Unlike headline inflation, underlying inflation smooths out short-term price spikes in volatile items like fuel and fresh food, offering a clearer view of longer-term trends.

On a headline basis, prices rose 0.9% over the quarter, with the cost of housing and education increasing, while prices for recreational activities and household goods fell.

RBA forecasts put underlying inflation at 2.7% by June, where it's expected to stay for at least two years.

But it's not just inflation data that could drive the RBA's next monetary policy decision.

"The turmoil abroad has ... changed the game and flipped the risks," Westpac chief economist and former RBA assistant governor Luci Ellis said on Thursday, ahead of the ABS' latest release. 

"A few months ago, the RBA’s main concern was that a still-tight labour market would keep domestic inflation pressures sticky," Ms Ellis said, noting the apparent expectation inflation may stall at 2.7%, short of the RBA’s preferred midpoint of 2.5%.

"[Now] holding rates steady in the face of the global turmoil and softer momentum in the labour market – for the sake of 0.2% on inflation – would be very hard to explain."

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