Bendigo Bank's Chief Economist, David Robertson, has released a report card on the Australian economy as the new financial year begins, forecasting a cash rate cut by the Reserve Bank of Australia (RBA) to 3.6% when the board meets next week.

Australia's Consumer Price Index (CPI) fell to 2.1% in May, with core measures like the trimmed mean falling below the 2.5% target, marking the lowest level since 2021. Per Robertson: "inflation appears back under control."

Sluggish retail sales data supports the likelihood of a cash rate cut. Full quarterly inflation numbers for Q2 will influence the timing of the next cash rate cut after the expected drop on July 8. "The next rate cut after July (to 3.35%) may not be until November, but the path back to more neutral rates does appear on track," said Robertson.

A further rate cut to 3.35% may occur in November, but a drop below a neutral cash rate of around 3.1% is unlikely due to strong employment levels. Unemployment is at 4.1%, lower than pre-pandemic levels and the average rate of 5.5% during the previous decade.

Australia is outperforming its economic peers, despite expectations of slightly higher unemployment ahead. Local financial markets are resilient despite geopolitical tensions, with stock markets at record highs.

The Australian dollar has strengthened against a weakening US dollar, rising about 4 cents since the start of 2025. The Australian dollar is expected to reach around 70 cents by early next year, though volatility is anticipated.

"This rally matches our forecasts of a path back to around 70 cents by early next year, but still with significant volatility expected. Our assumption of a weaker US dollar ahead lies with the expectation that US tariffs risk stagflation - or at best ‘slowflation’ - and recent US data clearly shows the slowdown in their economy, although not yet the expected jump for US inflation," said Robertson.

US tariffs are expected to lead to stagflation or 'slowflation', contributing to a weaker US dollar. Productivity is identified as a key short-term challenge for the Australian economy. "The global backdrop remains highly challenging although our lower direct exposure to US tariffs should translate to relative outperformance, and recent progress with moderating inflation will be very beneficial for Australia’s economy, leaving our underperforming productivity rate the primary challenge in the short term," said Robertson.

Australia's lower exposure to US tariffs is expected to result in relative economic outperformance. Financial markets are looking at the bright side of further increases to public spending, the promise of AI and other emerging technologies boosting revenues, and moderating inflation allowing more rate cuts ahead.

"Financial markets are looking at the bright side of further increases to public spending, the promise of AI and other emerging technologies boosting revenues, and moderating inflation allowing more rate cuts ahead," Robertson concluded.