Interpreting how the newest inflation numbers might affect your interest rate

Share and Follow

After the Reserve Bank of Australia (RBA) announced its , many Australians will be eagerly anticipating the central bank’s April decision.

The February cut resulted in rates being reduced from 4.35 per cent to 4.1 per cent and followed 13 consecutive hikes, starting in May 2022.

While many homeowners celebrated the rate cut, economists have warned that despite inflation sitting within the RBA’s target range, this does not mean the RBA will cut rates when its board meets next week.

A graph showing how Australia's interest rate has changed over the years.

The Reserve Bank reduced the official cash rate from 4.35 per cent to 4.1 per cent in February. Source: SBS News

On Wednesday, the Australian Bureau of Statistics released the monthly consumer price index (CPI), which measures the change in prices of goods and services.

In the 12 months to February 2025, the monthly CPI indicator rose 2.4 per cent, after holding steady at 2.5 per cent for the previous two months.

Tim Harcourt, professor and chief economist at the Institute for Public Policy and Governance at the University of Technology Sydney, said inflation is a key factor in the RBA’s cash rate decisions, with higher inflation often resulting in interest rate increases.

“The RBA has an agreement with the government that they have to keep inflation within the 2 to 3 per cent band,” he said.

“It means that the RBA’s job is basically to keep inflation down and no matter what the federal government does on wages or fiscal policy or budgets, it doesn’t matter. The RBA has one job.”

Harcourt said he expects the RBA will hold the cash rate at 4.1 per cent, and may consider another rate cut later in the year. Australia’s major banks are also predicting a cash rate hold.

“The latest inflation data was pretty promising … maybe the war’s not over, but the main battle seems to be done,” he said.

“The inflation outlook seems pretty good for the medium term.”

Sally Tindall, data insights director at financial comparison site Canstar, agreed and said she “very much” expects interest rates to remain on hold.

“We’re moving in the right direction, but I don’t think it’s enough to force the RBA’s hand into firing off another rate cut at next week’s meeting.”

Tindall said RBA governor Michele Bullock had warned Australians not to expect a series of cuts in quick succession.

“If we do see a number of cuts, I expect that the RBA will take quite a bit of time in order to deliver them because the last thing they want to do is to cut the cash rate too quickly or by too much only to see inflation pop back up again,” Tindall said.

Low productivity could influence rates

Robert Breunig, director of the Tax and Transfer Policy Institute and the Crawford School of Public Policy at the Australian National University, said Australia’s productivity rate could also play a factor in RBA’s decision.

He said while inflation and unemployment rates are positive, productivity levels are a concern.

“Productivity is very low, so the amount of goods and services we produce for every hour of labour isn’t going up,” he said.

“And that’s going to be one of the concerns for the RBA when they think about whether or not they should lower the rate that they charge banks to borrow money.”

Breunig said for wage increases and broader economic improvements, productivity should grow at a rate higher than inflation.

With this in mind, he said he would “sit tight” if he was in the position of making a cash rate decision.

“When I look at the upside and downside risks, I think I’m more worried about those upside risks and I suspect that’s what the RBA will do,” he said.

“A month ago, they said that they were pretty cautious about the future, and there was a lot of uncertainty, and I think they were signalling that they may well keep things on hold again.”

How Donald Trump could impact your interest rate

One international factor that could influence the Australian economy and RBA decision is United States President Donald Trump’s .

Breunig said the Trump presidency is creating “a lot of uncertainty” with tariffs, supply chains, and the potential impact on inflation.

“We don’t know what the effect of a Trump presidency is going to be on global conflict, and those things pose big inflation risks for Australia,” Breunig said.

“We have an open economy, we do a lot of trading with other people, so if prices start going up because of tariffs, that’s going to lead to inflation.”

Harcourt said , regardless of any actions from our government.

“The fear is that if you have a trade war and tariffs are put on everywhere, that will increase imported prices,” he said.

“So that will go into your domestic inflation level, not from anything that Australia has done badly. Even if our local inflation’s under control, you can’t help it if it goes into import prices.”

Tindall said that, while Trump’s tariffs could factor into further RBA decisions to come, she does not expect they will play a major part in the April meeting.

“The RBA takes the time to collect data, see how things evolve and makes informed decisions not kneejerk ones, and I think that’s really important to understand,” she said.

“So no, we are not going to see a kneejerk decision from the RBA on next Monday and Tuesday’s meeting.”

The Organisation for Economic Cooperation and Development, as it downgraded Australia’s economic growth forecast earlier this month, warned a broader trade war spiralling from the actions of the Trump administration would sap growth further and could cause inflation to tick up.

However, it still sees Australia’s inflation rate sitting within the 2 to 3 per cent band preferred by the RBA over the next two years.