The Reserve Bank of Australia (RBA) has left the official cash rate unchanged at 4.35 per cent, a move widely expected by economists and market commentators.
The RBA’s Statement on Monetary Policy has confirmed today’s decision was unanimous.
“As expected, the disruption to global oil supply is having an impact on inflation. Higher fuel prices have added directly to inflation and there are indications that this is passing through to the prices of other goods and services, so inflation is likely to remain high for some time,” the board stated.
“This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy.”
Members added that the RBA remains “focused on ensuring that inflation does not become embedded once the impulse from higher oil prices has passed through”.
“To achieve this, growth in demand needs to slow to reduce capacity pressures and help bring inflation back to target. Following the three increases in the cash rate target since the beginning of the year, financial conditions are now tighter than they were, and there are signs that the economy is slowing as expected.
“But inflation is still too high and the Board judged that it was appropriate to leave the cash rate target unchanged while it assesses the response to previous interest rate rises and the impact of the oil supply disruption,” members added.
The RBA’s statement has included a notable shift in tone, stating its usual line of doing what “it considers necessary” to achieve its goals, stating that it will “[increase] the cash rate target further if required”.
This decision follows three consecutive cash rate hikes in February, March and May, which were predominately spurred on by rising inflation and global economic turmoil after the onset of the US/Iran war, which sent oil prices skyrocketing worldwide following the closure of the Strait of Hormuz.
Preceding the announcement, Australia’s major banks shifted their forecasts to reflect that the RBA will likely keep interest rates at its current level of 4.35 per cent, with the possibility of monetary policy easing continuing in the later half of 2027.
This view is held by CBA, ANZ and NAB, with Westpac remaining the single outlier (at the time of writing), forecasting two further rate hikes in August and September, which would bring the cash rate to 4.85 per cent.
Westpac argued that inflation risks remain too prevalent for the RBA to claim victory, pointing to higher energy prices, wage growth and ongoing tensions in the Middle East.
Nevertheless, the latest GDP data for the March quarter released by the Australian Bureau of Statistics (ABS) revealed a rise of 0.3 per cent, supporting the case for a hold in today’s meeting, according to economists.
This was supplemented by a higher unemployment rate, which rose to 4.5 per cent over April 2026, and April’s CPI figures showing slight easing in Australia’s inflation rate, falling from 4.6 per cent in March to 4.2 per cent.
However, this is still well above the RBA’s long-coveted inflation target of 2-3 per cent. Underlying inflation had reversed course over the latter half of 2025 when it initially appeared that the central bank had achieved its goal of lowering inflation into the target range.
VanEck head of investments and capital markets, Russel Chesler, said inflation has cooled at the headline level, but “the pressure underneath is proving harder to kill”.
“Trimmed mean inflation is still above the RBA’s target band, services inflation remains sticky, and the second-round effects from higher transport costs are still feeding through the economy, from food to building materials and housing.
“The latest wage decision adds another layer of risk. A 6 per cent lift in the lowest minimum wage rates and a 4.75 per cent rise in award wages could keep services inflation higher for longer. That does not guarantee another hike, but it makes it dangerous to assume the RBA is done.
“The problem for the RBA is that the economy is slowing at the same time. GDP growth is weakening, unemployment has risen to 4.5 per cent, and households are running down savings buffers as spending outpaces disposable income. Australia is now facing the uncomfortable mix of softer growth and stubborn inflation,” Chesler said.
Chesler stated for these reasons, VanEck believes the terminal rate for the current cycle is 4.35 per cent, “or 4.6 per cent if the RBA is forced to move once more later this year”.
“The risk of stagflation has risen. That may not mean recession, but it does mean markets could be underestimating how difficult the next phase becomes,” he added.
Additionally, RBA governor Michele Bullock acknowledged the limits of monetary policy in the face of an externally driven energy shock – namely rising oil prices globally – during the board’s post-meeting press conference in May.
Bullock justified the previous rate hike stating that Australians are “poorer because of this shock to oil prices and energy prices”, and that the board was attempting to prevent a second wave of higher inflation driven by business pricing behaviour and wage dynamics.
Reacting to the decision, Dr Grant Feng, senior economist at Vanguard, said the hold should allow the Reserve Bank to “maintain current policy settings” and take its time assessing how earlier tightening is flowing through the real economy.
“Inflation will keep the RBA cautious. The near-term inflation profile remains uncomfortable: both headline and underlying inflation are still well above target and may rise further in coming months as higher energy prices pass through more broadly,” Dr Feng said. “These persistent inflation pressures argue against any dovish shift in the RBA’s communication. Even as the Bank pauses, it is likely to retain a tightening bias until there is clearer evidence that demand is slowing sufficiently to bring inflation sustainably back to target.”
Dr Feng added that activity indicators have softened since the May meeting, meaning the board is “unlikely to rush into additional rate hikes” barring any material upside surprise in underlying inflation.
“For the inflation outlook, what matters most is the balance between aggregate demand and aggregate supply. Even with sluggish productivity growth and limited supply-side momentum, the pullback in demand appears sufficient to move the economy gradually in the right direction,” he added.
