RBA holds at 4.35% but flags inflation risk through late 2027

The Reserve Bank of Australia held its cash rate at 4.35% Tuesday, pausing for a second consecutive meeting after three hikes earlier this year, while warning inflation remains too high and will not return to the midpoint of its target range until late 2027.

"There is continued uncertainty around the Middle East conflict and the extent to which it will have second-order effects on inflation and the broader economy," said Katherine Palmer, head of fixed income at BlackRock Australia. "We anticipate one further rate increase later this year on the basis of the RBA seeking to address the current inflation challenge and to mitigate anchoring of inflation expectations higher."

The RBA's nine-member policy board voted unanimously to hold, in line with market expectations. The ASX Rate Tracker had priced a 97 percent probability of no change, and all four major banks — Commonwealth Bank, NAB, ANZ and Westpac — had forecast a hold. June quarter inflation came in softer than expected, with headline at 3.8 percent annually and the trimmed mean at 3.6 percent, below the RBA's May forecast of 3.8 percent.

The cash rate has risen 75 basis points since February, when the board began unwinding the rate cuts delivered during 2025. For a borrower with a $600,000 mortgage and 25 years remaining, each 25-basis-point rise adds roughly $92 per month to minimum repayments. The cumulative effect of three hikes has tightened financial conditions across the economy, with the RBA noting that "financial conditions are now tighter than they were, and the economy appears to be slowing as expected."

Inflation stays sticky, housing cracks

The RBA said oil and most related commodity prices remain higher than before the Middle East conflict, with some firms passing on cost pressures to consumers. Short-term inflation expectations have eased but remain elevated. The board said it expects inflation to remain high with "upside risks" to its projection of returning to around the midpoint of the target range in late 2027.

The bank also flagged a cooling housing market. "Momentum in the housing market has shifted, with housing prices falling in some capital cities and new housing loans declining noticeably," the RBA said. ANZ said earlier Tuesday it expects capital-city house prices to tumble more than 10 percent in the current downturn, as higher rates and tax changes that made property investment less attractive weigh on demand.

Consumer spending growth is slowing gradually, and labour market conditions have eased more than expected, the RBA noted. Unemployment rose to 4.5 percent in April, and Q1 GDP growth came in at 0.3 percent. The softer activity data gave the board scope to pause this month, economists said, even as inflation remains well above the 2-3 percent target band.

What happens next

The RBA's next policy meeting is scheduled for September. Economists remain split on the path forward. Westpac chief economist Luci Ellis said the major bank does not expect further rate hikes this year, citing inflation that has been "more benign" than anticipated. HSBC chief economist Paul Bloxham expects the RBA to remain in "wait and see mode."

But BlackRock's Palmer sees another hike before year-end, and an MPA LinkedIn poll found 54 percent of respondents expect at least one further rate rise before 2026 closes. The RBA's own statement kept the door open: "The board remains focused on ensuring that high inflation does not become embedded."

The last time the RBA held rates after a tightening cycle while maintaining a hawkish bias was in 2023, when the bank paused at 4.10 percent for four consecutive meetings before cutting in 2025. If the current pause follows a similar pattern, mortgage holders could face several more months of elevated rates before any relief. The housing market's trajectory will be a key signal — a sharper-than-expected price decline could force the board to reconsider its tightening bias sooner than its inflation projection suggests.

This article is for informational purposes only and does not constitute investment advice.