Australia's Inflation Cooling? RBA Rate Cuts Might Be Further Off Than You Think – Here's Why to Act Now

The Australian inflation data for Q1 2025 is a mixed bag of hope and caution—a critical crossroads for investors watching the Reserve Bank of Australia (RBA). While headline inflation continues its decline, core metrics are stubbornly resilient, painting a picture of a central bank caught between easing pressures and persistent inflation risks. This isn't just about bond yields; it's a signal for where to allocate capital now. Let's dive in.

The Numbers: Headline Decline vs. Core Stickiness

The headline CPI inflation rate fell to 3.6% in March 2025, marking the fifth straight quarter of cooling. This is a victory for the RBA's aggressive rate hikes of 2022–2023. But here's the catch: trimmed mean inflation, which strips out volatile items, remains elevated at 4.0%—down from 4.2% but still above the RBA's 2–3% target. This core metric is the RBA's true north, and its stubbornness suggests underlying inflation pressures aren't fully tamed.

The split is clear: goods prices are crashing, with categories like footwear and furniture in outright deflation. Global supply chain improvements and policy interventions (hello, energy rebates) have crushed import-driven inflation. But services are the problem—rents soared 7.8% annually, the fastest since 2009, while education and insurance costs remain sticky.

Why the RBA Won't Cut Rates—Yet

Investors are pricing in rate cuts by mid-2026, betting that cooling headline inflation will force the RBA's hand. But the central bank's mandate is to hit the core inflation target, not just headline numbers. The RBA's dilemma? Services inflation, especially housing, is a domestic beast that rate cuts won't fix.

Take rents: Sydney's rental prices jumped 8.9% in the year to March. Without government rent caps (via the Commonwealth Rent Assistance program), they'd have surged 9.5%. This isn't a temporary blip—it's a structural issue of low vacancy rates and demand outpacing supply. The RBA can't “solve” this with monetary policy.

Meanwhile, the Energy Bill Relief Fund kept electricity prices flat in Q1, but this is a temporary fix. When subsidies fade, energy inflation could resurge. The RBA knows this and will wait for sustained core inflation data before easing.

Implications for the AUD: The Strong Dollar Isn't Going Anywhere

The Australian dollar (AUD) has been a rollercoaster in 2025. If the RBA delays cuts, the AUD could surprise to the upside against risk-off currencies like the yen or euro. But here's the twist: markets might overreact to any RBA “hawkish” comments, creating a buying opportunity.

Investors should watch the AUD/USD pair closely. A break above 0.6750 could signal a trend shift.

Investment Plays: Bet on the Resilient, Short the Fragile

1. Real Estate (ASX: REITs): Rents are rising, and demand remains strong. Look at diversified REITs like Stockland (SGP) or Goodman Group (GMG). They'll benefit from rising occupancy and pricing power.
2. Utilities (ASX: WES, TLS): The Energy Bill Relief Fund is a tailwind for regulated utilities. Worley and Talga Resources could thrive as energy infrastructure spending accelerates.
3. Short AUD/USD? Maybe Not Yet: Wait for the RBA to signal a pause. A rate cut delay could strengthen the AUD—counterintuitive, but central bank credibility matters.

The Bottom Line: Patience Pays

The RBA isn't done hiking rates—yet. But it also won't cut until core inflation trends clearly align with its target. For now, stay long AUD, own real estate, and avoid sectors tied to temporary deflation (e.g., consumer goods). The data is telling us this: inflation is cooling, but not fast enough for the RBA to blink.

Act now—don't wait for the RBA's next move. The market will react long before they do.

Investing involves risk, including loss of principal. Consult with a financial advisor before making decisions.