RBA Set for First Rate Pause of 2026 as Bets on Further Hike Ebb
(Bloomberg) — Australia is set to keep its key interest rate unchanged for the first time this year, with money markets paring bets on further tightening amid signs the economy is beginning to soften.
Economists anticipate the Reserve Bank will hold its cash rate at 4.35%, snapping a run of hikes at its first three meetings of 2026. Investors will focus on whether Governor Michele Bullock signals some comfort at the current rate or keeps the door open to further moves to counter stubborn price pressures.
The RBA chief holds her press conference at 3:30 p.m. in Sydney, an hour after Tuesday’s decision is released.
Australian households and the broader economy have been squeezed by resurgent inflation, the RBA’s rapid-fire rate rises and an Iran-war driven spike in fuel costs. That’s beginning to show up in data in the form of weaker growth, higher unemployment and a slight easing of inflation pressures.
Prashant Newnaha, Singapore-based chief macro strategist at TD Securities, said investors would interpret any message from Bullock that the cash rate is on a prolonged hold “as dovish, and this is where the risks lie.”
He worries that investors may over-interpret such guidance. “We doubt the RBA’s models signal an impending recession and with trimmed mean inflation remaining elevated for some time, any discussion of cuts to the cash rate is premature.”
Australia’s policy decision comes in a week when several major central banks are expected to stay on hold. The Federal Reserve, Bank of England and Swiss National Bank are all widely anticipated to stand pat, while markets have largely priced in a further tightening by the Bank of Japan.
The European Central Bank last week raised rates for the first time in almost three years, with President Christine Lagarde warning inflation triggered by the Iran war is widening beyond just energy.
The rate outlook in Australia realigned somewhat last week when National Australia Bank Ltd.’s Sally Auld scrapped her call for another RBA hike, citing mounting signs that economic momentum has slowed. Her view was buttressed by offshore events, with oil falling to a two-month low on signs of a possible end to the US-Iran war.
Money markets adjusted: at the start of last week, traders fully priced another RBA hike by December, yet by the end of the week, those odds were just 60%.
Since the central bank’s May meeting, unemployment has surprisingly risen to a 4-1/2 year high, household spending has fallen and economic growth came in a touch weaker than expected. Meantime, while inflation is still above the top of the RBA’s 2-3% target, recent readings showed momentum wasn’t as strong as feared.
Bullock told a parliamentary panel this month that the central bank has already seen some signs that its rate hikes are starting to work through the economy, pointing to a nascent slowdown in the housing market. The governor did, however, express concern about the risk of second-round inflation effects emerging from the energy shock triggered by the Iran war.
The RBA expects a sharp deceleration in economic growth over its forecast horizon through mid-2028, when it predicts headline and core inflation will return to the 2.5% midpoint of its target.
Still, some economists aren’t convinced the tightening cycle is over.
Citigroup Inc.’s Josh Williamson expects the RBA to pause this month but argues the decision may carry “hawkish overtones” due to uncertainty over the inflation outlook, and continues to forecast a quarter-point hike in August.
“While recent data provides space for a temporary pause, the risk of a domestic wage-price spiral and second-order inflationary effects from the Middle East conflict suggest policy is not yet restrictive enough,” he said.
–With assistance from Garfield Reynolds.
©2026 Bloomberg L.P.
