Luci Ellis: why the RBA’s outlook is less clear after May

Marina Karpathios
and
Luci Ellis
02:30pm May 06 2026

Westpac Chief Economist Luci Ellis unpacks what the RBA’s latest move really tells us about inflation, interest rates and the growing uncertainty ahead, as global pressures complicate the path forward.

Westpac Chief Economist Luci Ellis says an expected June rate hike is now more finely balanced after this week’s cash rate rise from the Reserve Bank.

 

The latest RBA decision highlights growing tension in the inflation outlook, with risks rising even as monetary policymakers signal they may pause to assess global developments.

 

Ellis says the RBA’s decision to lift the cash rate to 4.35 per cent reflected concern that inflation pressures are broadening, particularly following the conflict in the Middle East.

 

“The Board cited higher inflation stemming from the Middle East conflict, including second‑round effects, with risks tilted to the upside,” she says.

 

In its post‑meeting commentary, the RBA flagged that “higher fuel prices are likely to have second‑round effects on prices for goods and services more broadly”, adding to existing capacity pressures in the economy.

 

At the same time, Ellis said the Bank is acknowledging that higher interest rates may not be biting as hard as in previous cycles.

 

“Both the Statement on Monetary Policy and the Governor pointed to credit growth and other indicators as suggesting that financial conditions are not as tight for the same level of the cash rate as was true a few years ago,” she says.

 

Looking ahead, Ellis says further rate hikes this year remain likely.

 

“We still expect the RBA to tighten rates again this year. However, [Westpac economics] think a June move now looks more finely balanced,” she says.

 

She pointed to a shift in tone from Governor Michele Bullock, who framed recent rate rises as dealing with inflation pressures that existed before the Middle East conflict began.

 

“The Governor characterised the three rate hikes so far as dealing with the high inflation issue that already existed before the conflict started, and that this ‘gives space’ for the Board to see how the conflict played out,” Ellis says.

 

RBA forecasts show trimmed mean inflation peaking at 3.8 per cent in the June quarter and only returning to the 2.5 per cent target midpoint by mid‑2028. Those forecasts assume oil prices fall back to around US$80 a barrel by year‑end.

 

Ellis says that assumption may understate the risk.

 

“Our own assessment is that there is a bit more near‑term inflation to come,” she says, citing higher oil prices and more drawn‑out pass‑through to areas such as home‑building costs.

 

“Our own inflation forecasts see trimmed mean inflation peaking at 4 per cent and staying there for the remainder of 2026.”

 

Ellis also highlighted tensions in the RBA’s outlook, including softer growth forecasts, fragile assumptions around labour market participation and a downbeat view on productivity.

 

“A lot hangs on population growth, participation and productivity assumptions that remain uncertain,” she says.

 

A version of this article was first published on Westpac IQ.

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