• The RBA unanimously held its cash rate at 4.35% but warned that another increase remains possible if inflationary pressures strengthen.
  • Inflation forecasts were lowered, but price growth is expected to remain above target through 2026 as energy costs and Middle East tensions keep risks tilted to the upside.

The Reserve Bank of Australia left its cash rate unchanged today at 4.35% earlier today, marking its second consecutive meeting without a move. The vote was unanimous as widely expected by economists and markets.

While inflation eased more than expected, policymakers have made it clear that they are not yet ready to declare victory.

Inflation Cools, But Stays Above Target

The RBA reduced its inflation forecast after its latest CPI report came in softer than expected in Q2. Headline inflation is expected to ease around 3.6% by the end of 2026, down from the earlier forecast of 4%. ⁽¹⁾

The central bank’s preferred underlying measure, trimmed mean inflation, is expected to come in at 3.3%, also lower than before. Even so, both measures remain above the RBA’s 2 to 3% target band, and the central bank does not expect inflation to settle back into that range until the second half of 2027. ⁽²⁾

Policymakers said financial conditions have tightened following three rate hikes earlier this year, and the economy appears to be slowing broadly as expected.

Still, they stated that inflation “is still too high” and said they would do what is necessary to bring it back to target, including raising rates again if risks build on the upside. ⁽³⁾

Growth, Jobs, and Housing

The RBA slightly raised its growth forecast for 2026 to 1.4%, up from 1.3%, pointing to stronger business investment in data centers and faster population growth. ⁽⁴⁾

At the same time, the central bank expects the unemployment rate to climb higher than the previous forecast to 4.5% by the end of the year, with some outlooks pointing toward a peak closer to 4.8% by mid-2028. ⁽⁵⁾

Housing has cooled sharply after the earlier rate increases. Officials expect further softening in housing credit ahead, which could weigh on household spending.

Middle East Tensions Add Uncertainty

Policymakers flagged the conflict in the Middle East as a major risk to its outlook, since it has driven oil prices higher and could keep them higher for a while. The RBA said this remains a major factor in short-term price pressure and one of the main reasons for upside inflation risks.

Other risks include stronger demand tied to the global AI investment boom and a faster than expected slowdown in housing could pull consumption down further and ease pressure on prices sooner than forecast. ⁽⁶⁾

Market and Political Reaction

Markets showed only a mild reaction to the widely expected decision. The Australian dollar slipped slightly against the US dollar, while the ASX 200 rose modestly.

Following Governor Bullock’s comments, financial markets are pricing in around a 50% probability of a November hike and an 80% probability of an increase by early 2027. The chances of a rate hike therefore increased rather than declined. ⁽⁷⁾

Treasurer Jim Chalmers praised the decision, calling it a positive result given global uncertainty and pressure on households at home. He pointed out that inflation has moderated for three straight months, even though it remains higher than the government would like. ⁽⁸⁾

For now, the RBA appears comfortable holding rates steady while monitoring the economy, but another hike remains possible if inflation proves more persistent than expected.

Sources: ⁽¹⁾ ⁽²⁾ ⁽³⁾ ⁽⁴⁾ ⁽⁵⁾ ⁽⁶⁾ Reserve Bank of Australia, ⁽⁷⁾ Reuters, ⁽⁸⁾ Canberra Daily.