RBA Holds Key Rate, Willing to Tighten Further If Needed

(Bloomberg) — Australia’s central bank kept open the possibility of further policy tightening on Tuesday after leaving its key interest rate unchanged, as Governor Michele Bullock argued that inflation could still go either way.

The Reserve Bank’s nine-member board unanimously held the cash rate at 4.35%, its first pause of the year, in response to signs that a trio of hikes are beginning to weigh on the economy.

Bullock told reporters that a weakening housing market suggested the board was on the right track, adding that it didn’t consider the case for a rate increase at the June 15-16 meeting,

“You’ve got to expect a slowing in the economy, and when we see it, people shouldn’t be alarmed about that,” she said. “That’s what actually has to happen in order to bring inflation down.”

While Bullock was careful not to shut the door on further tightening, she expressed confidence that inflation and economic activity were evolving broadly in line with forecasts.

Traders looked through the hawkish signal and trimmed bets on another rate hike this year to under 60%, while the Australian dollar held declines. Three-year government bond yields erased an earlier gain to trade flat at 4.43%.

Today’s pause is a step back from the RBA’s aggressive tightening campaign that made it an outlier among major central banks. While policymakers continue to warn that inflation remains too high and that elevated energy costs linked to the Iran war pose upside risks, recent softer data provided scope for the RBA to hold and assess.

Three of the nation’s big four banks reckon the RBA will stand pat for the rest of 2026. National Australia Bank Ltd.’s Sally Auld cited a loss of momentum in the economy when she abandoned her call for another rate hike in August and projected the central bank will cut rates three times next year.

On Tuesday, Auld said it’s still too soon to expect a dovish shift from the RBA, with inflation taking precedence over growth for the time being. “Accordingly, we think it appropriate that the market retains some chance of tightening in the next few months,” she said.

Since the RBA’s May meeting, unemployment has surprisingly risen to a 4-1/2 year high, household spending has fallen and economic growth came in a bit weaker than expected. The housing market has also softened on higher borrowing costs and government tax changes.

While inflation is still above the top of the RBA’s 2-3% target, recent readings showed momentum wasn’t as strong as feared.

“The RBA is caught between two uncomfortable facts: inflation remains too high, while economic growth is clearly losing momentum,” said Stephen Smith, a partner at Deloitte Access Economics. “That makes its dual mandate difficult to manage.”

He added that “another rate hike later in 2026 therefore remains firmly on the table.”

The RBA’s decision aligns Australia more closely with a global backdrop in which central banks are increasingly choosing to wait rather than act. The Federal Reserve, Bank of England and Swiss National Bank are all expected to leave rates unchanged this week.

There are some exceptions. Central banks in Asia have been tightening policy to help tame inflation and shore up their currencies, while the Bank of Japan raised rates on Tuesday. The European Central Bank last week also tightened, with its first hike in almost three years.

For the RBA, the worry is that core inflation is forecast to remain above its target for the foreseeable future, even after the rate hikes. It also anticipates a sharp deceleration in growth over its forecast horizon through mid-2028. Those expectations were always subject to changes in the global geopolitical environment.

Bullock pointed to the interim US-Iran peace deal as a favorable development, saying uninterrupted oil flows through the Strait of Hormuz would help ease one of the biggest external threats to the inflation outlook. Details of the deal remain thin, however. The strait is set to reopen and analysts will be watching closely to see how many ships begin to transit the waterway.

“Resolution of the conflict in the Middle East is at an early stage, and there are plausible scenarios where inflation is higher and activity lower than envisaged,” the RBA’s board said. “Global oil supply issues will take some time to resolve.”

The RBA operates under a dual mandate that aims for inflation at the 2.5% midpoint of its target while seeking to maintain maximum sustainable employment.

Asked whether the board would wait for inflation to actually ease back to target before the RBA begins easing, Bullock said: “If you absolutely wait until you’ve got all the evidence and you’re looking in the rear-vision mirror, it’s probably too late.”

–With assistance from Garfield Reynolds and Matthew Burgess.

(Adds details from press conference, comment from economist, updates markets)

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