The Reserve Bank of Australia (RBA) has kept the official cash rate unchanged at 4.35%, giving mortgage holders a reprieve after three rate increases this year while warning that stubborn inflation could still force further tightening.
The decision was unanimous and widely anticipated by economists and financial markets, with the RBA balancing signs of slowing economic and housing activity against inflation that remains above its 2%-3% target range.
The central bank said inflation was still “too high” and was not expected to return to around the midpoint of its target band until late 2027.
“The Board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if upside risks materialise,” the RBA said.
Inflation forecasts revised lower
The RBA lowered its forecast for headline inflation to 3.6% by December, compared with its previous estimate of 4%, following a less severe-than-expected spike in oil prices stemming from the Iran War.
Its forecast for trimmed mean inflation — which strips out volatile price movements and is closely watched by policymakers — was also reduced to 3.3% from 3.5%.
The latest monthly inflation data showed headline inflation easing to 3.8% in June from 4% in May and coming in below the RBA’s expectations. Trimmed mean inflation held at 3.6%, rather than rising as economists had anticipated.
However, domestic inflation pressures remain elevated, with non-tradeable inflation running at about 4.9% year-on-year and around 5% on a 3-month annualised basis.
New dwelling construction costs have also risen 5.8% over the past year, representing another potential source of upward pressure on inflation.
The RBA said aggregate demand would need to remain subdued to reduce pressure on the economy and bring inflation sustainably back towards target.
Housing and economy showing signs of strain
Governor Michele Bullock has previously indicated that further cooling in economic activity and the labour market would be needed to contain inflation.
Housing has emerged as an increasingly important factor in the RBA’s assessment, with Bullock recently saying the market had weakened more sharply than anticipated.
“We had expected conditions to ease in response to the changed outlook for monetary policy and the rise in the cash rate earlier this year. But the housing market has eased by more than we had anticipated in May,” she said.
Weaker house prices could also reduce household spending through the so-called wealth effect, adding to the broader slowdown in demand.
The RBA's previous three rate increases have added about $272 to monthly repayments on a $600,000 mortgage.
Australia’s four major banks continue to expect the RBA’s next move to be a rate cut, although expectations for the first reduction have now been pushed out until at least mid-2027.
HSBC chief economist Paul Bloxham said the bank expected weaker growth, softer housing conditions and a loosening labour market to eventually remove the need for further rate rises.
“We see the downswing in growth being sufficient that the RBA begins to cut its cash rate in H2 2027,” Bloxham said.
“However there is still some risk that core inflation does not fall fast enough and that the RBA chooses to hike again.”
Markets retain focus on inflation risks
BNY APAC macro strategist Wee Khoon Chong said the RBA had maintained a hawkish bias despite leaving rates unchanged.
He said the bank's description of monetary policy as “somewhat restrictive” was balanced by a continued willingness to raise rates should inflation remain stronger than expected.
Falling house prices and weaker housing credit represented the principal dovish elements of the decision and could make another increase less likely, Chong said.
BNY remains positive on the Australian dollar, pointing to its relatively attractive yield compared with other G10 currencies, while markets are pricing around a 50% probability of another rate increase by year-end.
Small businesses gain short-term relief
Xero economist Louise Southall said the decision would provide some relief to small businesses already feeling the effects of higher borrowing costs and slowing consumer demand.
“Small business owners were already starting to see the impact of previous rate hikes on their bottom lines, so today’s decision from the RBA provides some relief,” Southall said.
She said keeping rates unchanged could provide some stability for consumer spending and business confidence, although businesses continue to face elevated operating costs and higher fuel prices.
Xero Small Business Insights data showed sales growth slowing to 6.5% year-on-year in the June quarter from 7.9% in the March quarter.
Monthly sales growth was weaker at 4% in May and 4.8% in June, providing further evidence that tighter monetary policy is weighing on demand.
Southall said businesses would need to continue carefully managing cash flow as inflation remained elevated and the effects of previous rate increases continued to flow through the economy.