The RBA is widely expected to hold the cash rate at 4.35% today - its first pause of the year after three straight rate hikes. The energy price shock stemming from the Middle East conflict on top of renewed inflationary pressures in Australia prompted the RBA to change course this year after it cut rates three times in 2025. Recent data have been patchy, while the US-Iran agreement to suspend hostilities and reopen the Strait of Hormuz should remove the risk of another hike for now. Even with a pause today, the RBA is likely to retain its tightening bias. Inflation is above target and still forecast to rise further. Market pricing factors in a high chance of one more hike this year.
The Monetary Policy Board voted 8-1 to hike by 25bps last time out in May, raising the cash rate to 4.35%. That was its third straight hike following the split decision (5-4) in March and the unanimous verdict (9-0) that started the tightening cycle in February. Having now reversed all three of 2025's rate cuts, the Board's stance was that rates were now 'well placed' to respond as the economic outlook evolves, implying that it is comfortable with pausing. However, it maintained its implicit tightening bias through its commitment to 'do what it considers necessary' to return inflation to the target.
The Board is now likely to move to wait-and-see mode. At a recent Senate testimony, Governor Bullock said the incoming data had 'not been materially different' to its expectations, with the next forecast round not due until August - after the key June quarter inflation report. That summation of the data leaves room for debate given downside risks to growth appear to have increased. GDP growth in the March quarter was lacklustre ahead of the full impact of higher petrol prices and rate hikes (see here), while the unemployment rate rose to a high since late 2021 at 4.5% in April (see here).
Governor Bullock reiterated to the Senate committee that higher rates had been necessary as risk mitigation for potential second-round effects from the energy price shock. The RBA has sought to slow demand so that higher energy prices are less likely to drive a more widespread and persistent increase in inflation and wage pressures. Higher rates are unable to offset inflation from rising in the near term. The RBA forecasts inflation to peak by mid-year at 4.8% in headline terms and 3.8% on a trimmed mean or underlying basis, up from 4.1% and 3.5% respectively at present in the quarterly data to March. Governor Bullock did, however, point to softer conditions in the housing market as a sign that tighter monetary policy was starting to take effect.
