The Reserve Bank of Australia (RBA) has left its official cash rate unchanged at 4.35%, but warned that further increases remain possible. The widely anticipated decision on Tuesday offers little respite for mortgage holders already strained by three consecutive rate hikes earlier in 2026.
Governor's Stance on Inflation
RBA Governor Michele Bullock stated that another rate hike is on the table because prices are still rising too quickly. "If we need to increase again, we will," she said. Bullock noted that the RBA is not alarmed by the unemployment rate rising to 4.5%, describing the jobs market as "a bit tight," and does not expect the economy to contract. "We don’t want to put it into recession; we want to slow it enough to bring inflation back down," she explained.
Inflation Challenges Persist
Bullock indicated that Australia's inflation problem would not be resolved even if oil supply normalizes and Donald Trump's peace deal with Iran succeeds. "[Peace] will help ensure inflation doesn’t get supercharged, but we still have to address the inflation problem we had prior to the conflict," she said.
Economic Outlook and Market Reactions
Stephen Smith, partner at Deloitte Access Economics, said the RBA had "little choice but to wait" to see how much further the economy slows and how soon oil supply returns to normal. "Another rate hike later in 2026 therefore remains firmly on the table," Smith added. Rates markets continue to bet on a 55% chance of another hike by December, with Westpac predicting a hike in August. However, currency and stock traders began betting that hikes have become less likely. The Australian dollar fell from 70.54 to 70.49 US cents, while the S&P/ASX200 index rose from 8,890 to 8,914 points.
Commonwealth Bank and ANZ maintained their predictions that interest rates have peaked and will be cut in 2027. CBA economist Belinda Allen described the RBA's perspective as "balanced." Bullock revealed that the board did not even consider hiking rates on Tuesday, and the decision to hold was unanimous.
Impact on Households and Businesses
As household spending slows under the weight of rate hikes, businesses have told the RBA they are uncertain about raising prices. "Part of bringing excess demand down is lowering [spending] so businesses find it harder to pass on cost increases," Bullock said. Economic activity was already slowing early in 2026. Households barely increased non-essential spending in the March quarter but cut back on savings to cover essentials like electricity and fuel. Real GDP growth faltered to 0.3% in the March quarter, down from 0.9% in the December quarter of 2025.
For an owner-occupier with an average new mortgage of $745,000 at a typical rate of 6%, monthly repayments have risen from $4,114 to $4,467 due to the year's rate increases. A fourth hike in August would add another $120 per month.
Government Response
Treasurer Jim Chalmers welcomed the decision to hold rates, telling reporters, "It doesn’t make life any easier for people, but it doesn’t make life harder either."
