The Reserve Bank of Australia kept interest rates unchanged on Tuesday, as widely expected by markets. The decision came after recent data showed signs that inflation may be cooling.
However, the RBA made it clear that inflation is still too high. The central bank also warned that further rate hikes remain possible if price pressures rise again.
Interest Rates Stay Unchanged
The RBA held its benchmark interest rate at 4.35% in a unanimous decision. So far this year, the bank has raised rates by a total of 75 basis points.
Markets had largely expected the pause after Australia’s second-quarter consumer price index came in softer than forecast.
Inflation Forecasts Lowered
Although the RBA kept a cautious tone, it also lowered its inflation forecasts for the end of 2026.
The bank now expects CPI inflation to reach 3.6% by the end of 2026, down from its previous estimate of 4.0%. Underlying inflation, measured by trimmed mean CPI, is now expected at 3.3%, compared with the earlier forecast of 3.5%.
Inflation Still Above Target
Despite the lower forecasts, the RBA said both headline and core inflation remain elevated. It also warned that inflation could stay high in the near term.
One major concern is the impact of higher fuel prices, which the central bank linked to the Iran war. These costs could continue to add pressure to consumer prices.
The RBA expects inflation to return to its 2% to 3% target range only by the end of 2027.
More Rate Hikes Still Possible
The central bank said it will take further action if needed to bring inflation back under control.
The RBA noted that it may raise the cash rate again if upside inflation risks appear. This keeps a tightening bias in place, even though rates were left unchanged at this meeting.
Domestic Demand Remains a Concern
The RBA also pointed to capacity constraints in the Australian economy. It said domestic demand still needs to slow further to help reduce inflation.
Tighter financial conditions from previous rate hikes are already affecting the economy. However, the central bank believes inflation remains too high to declare victory.
Analysts Expect the RBA to Stay Cautious
Analysts at Capital Economics said the RBA is likely to keep a tightening bias for some time. They cited strong cost pressures and uncertainty linked to the Middle East conflict.
However, they also suggested that the RBA may not raise rates again in this cycle. Instead, they expect the next move to be a rate cut, but likely not before the second half of 2027.
Economic Growth and Jobs Outlook
The RBA expects Australian economic growth to cool by the end of 2026. Still, it slightly raised its GDP growth forecast to 1.4%, up from 1.3%.
At the same time, the unemployment outlook worsened. The RBA now expects unemployment to reach 4.5% by the end of 2026, compared with its previous estimate of 4.3%.
Conclusion
The RBA’s latest decision shows that the central bank is not ready to ease policy yet. While inflation is moving in the right direction, price pressures remain too high.
For now, the RBA is keeping rates steady, but the door remains open for more hikes if inflation risks return.
