Annual inflation remained steady at 2.4 per cent in the March 2025 quarter as core inflation fell within the Reserve Bank’s target bands for the first time since 2021, ABS data showed.

Annual core inflation, the RBA’s preferred measure, cooled to 2.9 per cent in the March quarter, down from 3.3 per cent in the December quarter.

With core inflation within the Reserve Bank (RBA)’s 2-3 per cent target range, the door is open for an interest rate cut in May. However, global economic risks stemming from erratic US trade policy have complicated the RBA’s outlook.

“With the Australian economy having turned the corner but growth still sluggish, today’s Consumer Price Index (CPI) data shows the door is open for the Reserve Bank of Australia (RBA) to cut rates in May,” Pradeep Philip, head of Deloitte Access Economics said.

“A May rate cut should not be viewed as the RBA declaring ‘mission accomplished’ in the fight against inflation. Instead, it should be viewed as insurance against any collateral damage a trade war and geopolitical turbulence may cause the Australian economy.”

March inflation data largely aligned with the RBA’s projections. The Reserve Bank predicted that core inflation would stabilise in 2025, settling at 2.7 per cent from June onwards, slightly above their preferred midpoint of 2.5 per cent.

“The inflation data today is essentially in line with the RBA’s forecasts and therefore the Board will consider the prices side of the economy evolving in line with its expectations,” CBA economists wrote in an update.

However, Philip warned that the US trade war with China could pose two-sided risks for the Australian economy, compounding uncertainty for the RBA.

On one hand, a surplus of Chinese exports in the global market could lower the prices of goods coming into Australia, leading to weaker price growth. A global economic slowdown would also be deflationary. Conversely, supply chain disruption could spark inflation as businesses adapt their operations to minimise their exposure to tariffs.

Banks and economists have appeared to place more weight on the deflationary threats of the tariff war and predicted deeper interest rate cuts throughout 2025.

All four major banks predict that the RBA will lower the cash rate by 25 basis points in their May 19-20 meeting, which would take the cash rate to 3.85 per cent. They expect four 25 basis point cuts throughout 2025, which would lead to an end-of-year cash rate of 3.35 per cent.

Deloitte Access Economics echoed this prediction, saying the RBA would cut interest rates by a total of 100 basis points throughout the 2025 calendar year.

Traders priced in a 62 per cent chance of a steeper 50 basis point cash rate cut in May as of Tuesday, the ASX RBA rate tracker showed, which would take the cash rate to 3.60 per cent after the RBA’s May meeting.

ABS data indicated that the largest contributors to inflation in the March quarter were housing, which rose by 1.7 per cent across the quarter, education (+5.2 per cent) and non-alcoholic beverages (+1.2 per cent).

Rising electricity prices (+16.3 per cent) drove the growth in housing inflation, the ABS said. Power costs in Brisbane rose in the March quarter as the $1,000 state government electricity rebate wound down, resulting in higher out of pocket electricity costs.

Annual services inflation was 3.7 per cent in the March quarter, down from 4.3 per cent in the December quarter.

“This is the lowest annual outcome for Services inflation since the June 2022 quarter, reflecting easing inflation across a broad range of services, including rents and insurance,” Leigh Merrington, ABS acting head of prices statistics, said.

Domestic trends aside, Creditorwatch chief economist Ivan Colhoun reiterated that the trajectory of US tariff policies would likely influence Australia’s cash rate throughout 2025.

“By easing the degree of monetary restriction a little further in May, the Board is likely to remain well placed to maintain low unemployment in Australia in the face of global headwinds and uncertainties, while also ensuring that inflation continues to head lower,” Colhoun said.

“At this stage further rate cuts over 2025 of 50-75bps seem likely (if tariff uncertainty lessens relatively quickly), while larger cuts would be appropriate if the current very large tariff increases are maintained.”