RBA cannot relax on inflation – HSBC’s Bloxham

Mike Taylor

Managing Editor and Publisher

29 April 2026

The Australian economy may need to experience a downturn to get inflation to fall back towards the Reserve Bank of Australia’s (RBA) inflation target, according to HSBC chief economist, Paul Bloxham.

According to Bloxham, while other central banks may be able to ‘wait and see’ with respect to the global energy events, the RBA and the Reserve Bank of New Zealand do not have that luxury.

He writes that for the RBA, the challenge is that inflation was already too high, even before the Middle Rast conflict energy price shock and HSBC expects this week’s first quarter Consumer Price Index figures to confirm that the headline and trimmed CPI mean are well above the 2.5% target.

“And this is before the full effect of the fuel price shock arrives,” he said.

“The March monthly CPI reading, published at the same time, is expected to show a jump in fuel prices, but a much sharper jump is likely in April.”

“At the same time, the Australian economy has also been operating beyond its sustainable capacity and the jobs market has been tight. In our view, this combination makes Australia is one of the least well-placed developed economies to deal with the inflation shock that is arriving.

“In short, in Australia the risk that the short run spike in headline inflation gets quickly into inflation expectations is higher than elsewhere.

“A tight jobs market means a higher likelihood than workers successfully demand high wages to seek to compensate for the higher inflation. A stronger economy means firms may have more pricing power, to pass on cost base increases.

“A lesson is that it is important to seek to have inflation close to target as often as possible, because that can give the central bank more flexibility in the face of the next (largely unpredictable) shock. With the RBA having taken the slow road to getting inflation back to target – down a ‘narrow pathway’ that they eventually fell out of – the economy is now not very well placed to deal with the next shock.

“As a result, we expect the Australian economy will need to have a downturn to get inflation to fall back towards the RBA’s target. The only real questions, in our view, are: how big that downturn will be and what drives it.

“On the growth front, our reading is that the economy has already sustained two shocks that are set to weaken it markedly – the RBA’s two rate hikes and the fuel price shock. We see the recent sharply weaker sentiment readings as an indication that the downturn is already beginning.

“That said, we expect the RBA will still choose to lift its cash rate further in May, to 4.35%. Inflation is too high and set to rise further and the jobs market is tight on the latest reading (acknowledging that the jobs market lags the activity cycle). We think it will be very hard for the RBA to plausibly argue that inflation will return to target over a reasonable time horizon without tightening further.

“Whether the RBA hikes further after May will depend on how quickly the jobs market shows signs of loosening. If the sharp negative shock to sentiment transmits quickly to weaker activity and businesses hiring plans – as we expect it will – then the May