The Reserve Bank of Australia (RBA) has maintained its official cash rate at 4.35% following its meeting on Tuesday, as economic activity weakened and unemployment climbed to a four-year high.
Rate Decision Brings Little Relief
The widely anticipated decision offers scant comfort to mortgage holders already under pressure from three consecutive rate hikes earlier in 2026. For an owner-occupier with an average new mortgage of $745,000 at a typical rate of 6%, monthly repayments have risen from $4,114 to $4,467 due to this year's increases. A fourth hike would have added an extra $120 per month.
Consumer Spending and GDP Slow
Households barely increased spending on non-essential items in the three months to March, cutting back on savings to cover essentials like electricity and fuel. This restrained consumer spending contributed to real GDP growth slowing to just 0.3% in the March quarter, down from 0.9% in the December quarter of 2025.
Unemployment rose to 4.5% in May, the highest level since 2021.
Expert Views on Rate Impact
Justin Zook, a senior director at Fitch Ratings, noted that interest rate hikes are likely to hit household spending harder in 2026 than in previous years, partly because households have less savings. "Households just don't have those piles of cash that they had because they weren't out spending money during the pandemic," Zook said.
Bank Forecasts Diverge
All four major banks expected rates to remain on hold on Tuesday. Top economists from ANZ, Commonwealth Bank, and NAB predicted rates have peaked and will begin to fall from mid-2027. However, financial markets are betting on a rate hike within the next 12 months.
Westpac has forecast the cash rate will rise in August and September, with no cuts until 2028. Westpac's chief economist, Luci Ellis, predicted inflation will peak at 4.7% in late 2026, higher than the RBA's forecast. In a note on Friday, Ellis wrote that higher fuel prices stemming from the US-Israel conflict with Iran would push up freight and other costs, keeping inflation elevated through 2026. Westpac expects petrol prices to average 205 cents per litre and diesel 239 cents per litre over the next three months after the government's fuel excise cut ends.
