RBA holds rates at 4.35%, signals readiness to hike if inflation stays high
Australia's central bank paused rate rises but warned of further hikes ahead if price pressures persist.
The Reserve Bank of Australia has held its official cash rate steady at 4.35%, pausing after three consecutive rate rises earlier this year. The decision was widely anticipated, but the RBA's accompanying statement delivered a cautious signal: rate cuts remain unlikely, and another hike remains possible if inflation does not fall as expected.
Inflation remains the priority
The core reason for holding rates steady is that inflation has not yet been brought under control. Headline inflation eased to 4.2% in the year to April, down from 4.6% in March. However, the trimmed mean inflation rate—the RBA's preferred underlying measure—rose to 3.4% from 3.3%, signalling that broad-based price pressures remain entrenched.
"Headline and underlying inflation are still too high," the RBA said in its statement.
The central bank warned that inflation is likely to stay elevated "for some time" as higher fuel prices flow through to other goods and services. RBA Governor Michele Bullock told a press conference: "I understand that this is difficult period for all households. That's why it's so important we get on top of inflation now. High inflation hurts all Australians, especially the most vulnerable."
Recent falls in global oil prices, following a tentative Iran peace deal, may offer some relief. However, Australia's temporary fuel excise cut is scheduled to end on June 30, which could prop up petrol prices and temporarily push headline inflation higher, complicating the inflation picture.
A slowing economy checks the rate hike case
At the same time, the case for further rate increases has weakened. Australia's economy grew by just 0.3% in the March quarter, signalling a loss of momentum. Higher borrowing costs are weighing on household spending and mortgage repayments remain a burden for many households.
The RBA observed that consumer spending growth is slowing as intended, and the housing market's momentum has shifted. The jobs market, too, is cooling: the unemployment rate rose to 4.5% in April, its highest level since late 2021, while job vacancies have fallen. This should help reduce wage and inflation pressures over time.
What comes next
Despite the economic slowdown, the RBA has signalled that cutting rates now would be premature. The board reaffirmed its focus on price stability and said it will "do what it considers necessary to achieve that outcome, including increasing the cash rate target further if required."
While a prolonged pause in rate moves is the most likely outcome, analysts expect the next move to be another hike rather than a cut, should inflation prove sticky.