The RBA left the cash rate unchanged at 4.35% following today’s Board meeting. The decision was unanimous and widely expected. Interest-rate markets had virtually no chance of a move priced in ahead of the meeting.
The outcome was unsurprising. Data published in recent weeks showed underlying inflation, the RBA’s preferred measure of inflation, was softer than the RBA had expected. The unemployment rate was also higher than the RBA had forecast for the June quarter. That combination, together with economic activity evolving broadly as expected, gave the RBA scope to remain on hold and continue assessing the impact of earlier rate hikes.
The bigger question is whether this marks the peak in the cycle or whether households and businesses should brace for one more rate hike before Christmas.
The statement and fresh forecasts provide some clues. The RBA talked tough on inflation. That was to be expected given underlying inflation remains elevated and above the Bank’s 2–3% target band.
The RBA noted that inflation is not expected to return to around the midpoint of the target range until late 2027 and warned there are “upside risks” to that projection, preserving the option of another rate hike if inflation proves more persistent than expected.
But our core view remains that there will be no further rate hikes and that the next move in interest rates will be a cut next year.
The RBA’s updated forecasts support that view. The Bank has lowered its underlying inflation forecasts over the next year. It now expects underlying inflation to return to the target band sooner, in June 2027.
At the same time, unemployment forecasts have been revised higher across the profile. The unemployment rate is now expected to reach 4.5% by the end of this year, up from 4.3% previously. It is then expected to rise to 4.7% by the end of 2027, compared with 4.6% previously.
Together, these forecasts suggest capacity pressures in the economy are gradually easing. However, uncertainty remains elevated, meaning another rate hike cannot be completely ruled out and further progress on inflation is still needed.
What could undo our view? Household spending has remained resilient. If that resilience lasts longer than expected, inflation pressures could prove more persistent. But we think spending momentum will soften as higher interest rates continue to work through the economy, the labour market loosens and the housing market downturn deepens.
Geopolitical risks also remain important. A continuation or escalation of the conflict in the Middle East could push oil prices sharply higher and create renewed inflation pressure. Oil prices remain volatile, although the pass-through to broader inflation has so far been modest.
Sluggish productivity growth remains a key challenge, limiting how fast the economy can grow without fuelling inflation. Even so, the balance of evidence suggests the cash rate has peaked.
