RBA interest rates: Reserve Bank holds official cash rate at 4.35% as economy slows and unemployment rises | Reserve Bank of Australia
The Central Bank warned that it was ready to raise interest rates further, although it kept the official interest rate at 4.35%.
Tuesday’s widely anticipated decision will bring little relief to mortgage holders already hard-pressed by the RBA’s three successive rate hikes in early 2026.
In a statement accompanying the decision, the RBA’s interest-setting board said inflation was still too high and economic activity should slow further.
“To achieve this, demand growth needs to slow to reduce capacity pressures and help bring inflation back to target,” the board said.
“There are signs that the economy is slowing as expected. However, inflation remains very high and the board decided that it was appropriate to leave the cash rate target unchanged while it assesses the response to previous interest rate increases and the impact of the oil supply disruption.”
“It will do whatever it deems necessary to achieve this outcome, including further increasing the cash rate target if necessary.”
All four major banks expected interest rates to remain steady on Tuesday. Leading economists from ANZ, the Commonwealth Bank and NAB had predicted that interest rates had peaked and would start falling from mid-2027.
However, financial markets believe that it is more likely than not that there will be no interest rate increase in the next 12 months.
Westpac had predicted that the cash rate would increase in August and September and that there would be no cuts until 2028. Luci Ellis, Westpac’s chief economist, predicted inflation would peak at 4.7% in late 2026, above the RBA’s forecast.
In a note Friday, Ellis wrote that higher fuel prices resulting from the U.S.-Israeli war against Iran will increase freight and other costs and keep inflation high through 2026. Westpac expects petrol prices to average 205 cents a liter and diesel prices to average 239 cents a liter for the three months after the government fuel cut ends.
On Tuesday the RBA board said high fuel prices were starting to drive up the prices of some goods and services as expected. It was stated that they were determined to prevent additional price increases.
The board also said inflation could rise further than expected in May and the economy could slow further than expected despite Donald Trump’s recent agreement to end his war against Iran.
“The resolution of the conflict in the Middle East is at an early stage and there are plausible scenarios in which inflation is higher and activity is lower than projected in the May baseline forecasts,” the board said.
Investors took this decision as a sign that rate cuts would be less likely. Immediately following the decision, the Australian dollar fell from 70.54 US cents to 70.49 and the Australian stock market jumped; The benchmark S&P/ASX200 index fell from 8,890 points to 8,914 points.
Deloitte Access Economics partner Stephen Smith said on Tuesday the RBA had “no choice but to wait” to see how much further the economy slows and how soon oil supplies return to normal.
“Therefore, another interest rate increase remains on the table towards the end of 2026,” Smith said.
Economic activity was already slowing in early 2026. Households barely increased their non-essential spending in the three months to March but cut back on savings to spend on essentials such as electricity and fuel.
Slowing consumer spending caused real GDP growth to fall from 0.9% in the December quarter 2025 to just 0.3% in the March quarter.
Unemployment rose to 4.5% in May for the first time since 2021.
The board said it expected consumer spending to slow and was not concerned about the high unemployment rate, given other measures that showed the job market was “more resilient.”
For a person who owns average size new mortgage $745,000, I’m paying now typical rate Annual rate increases resulted in monthly repayments rising from $4,114 to $4,467, a 6% increase. Tuesday’s fourth rate hike would add another $120.
Finance Minister Jim Chalmers welcomed the decision to keep interest rates steady, speaking to reporters on Tuesday.
“This doesn’t make people’s lives easier, but it doesn’t make it harder,” Chalmers said.
Justin Zook, a senior manager at Fitch Ratings, said Monday that increases in interest rates will likely hit household spending harder in 2026 than in 2022 and 2023, in part because households have less money in savings.
“Households don’t have those piles of cash that they had because they weren’t spending money outside during the pandemic,” Zook said.
