The Reserve Bank of Australia (RBA) has left the official cash rate unchanged at 4.35%, choosing to pause after raising interest rates three times already this year.
The decision was widely expected. Inflation remains above the RBA’s 2–3% target range, while the economy is slowing and households continue to feel the strain of higher borrowing costs.
Importantly, however, the accompanying statement contains no indication that interest rate cuts are on the horizon. Instead, the RBA board reaffirmed that it is focused on price stability and
will do what it considers necessary to achieve that outcome, including increasing the cash rate target further if required.
While another prolonged pause remains the most likely outcome, the next move is more likely to be another rate hike than a rate cut.
The inflation fight is not over
The strongest reason for keeping rates unchanged is that inflation has not yet been brought fully under control.
Headline inflation eased to 4.2% in the year to April, down from 4.6% in March. But underlying inflation remains more concerning. The key underlying measure, the trimmed mean inflation rate, rose to 3.4% from 3.3%, suggesting broad-based price pressures remain sticky.
The RBA said “headline and underlying inflation are still too high”. It warned that inflation is likely to remain high “for some time” as higher fuel prices feed through to the prices of 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.
Oil prices have fallen this week on news of a tentative peace deal in the Iran war, but the effects of the past spike in oil continue to spread through the economy.
The federal government’s temporary fuel excise cut is due to end on June 30, which could place upward pressure on petrol prices and temporarily lift headline inflation.
Against that backdrop, cutting interest rates now would be premature.
The economy is slowing
At the same time, another rate increase would be hard to justify.
Australia’s economy grew by only 0.3% in the March quarter, showing momentum has slowed. Higher borrowing costs are weighing on household spending, and mortgage repayments remain high.
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This is what higher rates are designed to do. The RBA observed “there are signs that growth in consumer spending is slowing as expected and momentum in the housing market has shifted”, suggesting earlier rate increases are beginning to dampen demand.
The jobs market 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.
But the slowdown is not severe enough to justify cutting rates. And business investment is still strong, while credit remains readily available.
This gives the RBA a clear reason to wait. The full effects of this year’s three rate rises have not yet been felt, and holding steady gives the bank more time to assess whether the economy is slowing enough to bring inflation back to target.
Other central banks are also cautious
Australia is not alone in facing this policy trade-off. Around the world, central banks are trying to judge whether inflation is sufficiently under control, while avoiding unnecessary damage to growth and employment.
In the United States, the Federal Reserve also left interest rates unchanged at its April meeting. It stressed that it would “carefully assess incoming data, the evolving outlook, and the balance of risks” before making further policy adjustments, pointing to a cautious, data-dependent approach.
The European Central Bank has faced a different challenge. It recently raised rates in response to renewed inflation risks from higher energy prices, while also emphasising that future decisions will depend on new data.
The common message is clear: central banks are reluctant to move too quickly. With inflation uncertain and global risks elevated, they do not want to cut rates prematurely and risk reigniting price pressures.
What this means for households
For mortgage holders, the decision means repayments remain high, but at least they will not rise again immediately.
For savers, deposit rates are likely to remain stable.
For households more generally, the pressure from high interest rates will continue. Consumer spending is likely to remain subdued until inflation falls further and the RBA has room to cut rates.
What happens next?
The RBA has made clear that future decisions will depend on the incoming data. As the RBA board put it, it “will be attentive to the data and the evolving assessment of the outlook and risks”.
If inflation falls faster and growth weakens further, the case for cuts will strengthen. But if underlying inflation remains stubborn — or fuel prices push headline inflation higher — the RBA may need to lift rates again.
For now, an extended pause looks most likely. But if the RBA is forced to move, the next step is more likely to be another increase than a cut.
