The Reserve Bank of Australia (RBA) has decided to keep the official cash rate unchanged at 4.35%, pausing after raising interest rates three times earlier this year. The decision was widely anticipated by economists and markets.
Inflation Remains a Concern
Inflation is still above the RBA's target range of 2–3%. Headline inflation eased to 4.2% in the year to April, down from 4.6% in March. However, underlying inflation, as measured by the trimmed mean, rose to 3.4% from 3.3%, indicating persistent price pressures. The RBA stated that both headline and underlying inflation are still too high and are likely to remain elevated for some time due to rising fuel costs feeding through to other goods and services.
RBA Governor Michele Bullock acknowledged the difficulty for households, emphasizing the importance of controlling inflation to protect all Australians, especially the most vulnerable.
Oil prices have recently fallen on news of a tentative peace deal in the Iran war, but the effects of the earlier spike continue to impact the economy. The federal government's temporary fuel excise cut is set to end on June 30, which could push petrol prices higher and temporarily increase headline inflation. Against this backdrop, cutting interest rates now would be premature.
Economic Slowdown
Another rate increase would be hard to justify given the slowing economy. Australia's GDP grew by only 0.3% in the March quarter, indicating reduced momentum. Higher borrowing costs are weighing on household spending, and mortgage repayments remain high. The RBA noted signs that consumer spending growth is slowing as expected and that the housing market's momentum has shifted, suggesting earlier rate increases are beginning to dampen demand.
The labor market is cooling, with the unemployment rate rising to 4.5% in April, the highest since late 2021, and job vacancies falling. This should help reduce wage and inflation pressures over time. However, the slowdown is not severe enough to justify rate cuts. Business investment remains strong, and credit is still readily available, giving the RBA reason to wait.
The full effects of this year's three rate rises have not yet been felt, and holding steady allows the bank more time to assess whether the economy is slowing enough to bring inflation back to target.
Global Central Banks Also Cautious
Australia is not alone in facing this policy trade-off. Central banks worldwide are trying to determine if inflation is sufficiently under control while avoiding unnecessary damage to growth and employment. The US Federal Reserve left interest rates unchanged at its April meeting, emphasizing a cautious, data-dependent approach. The European Central Bank recently raised rates in response to renewed inflation risks from higher energy prices, also stressing 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.
Implications for Households
For mortgage holders, the decision means repayments remain high, but they will not rise again immediately. Savers can expect deposit rates to remain stable. More broadly, households will continue to feel pressure from high interest rates. Consumer spending is likely to stay subdued until inflation falls further and the RBA has room to cut rates.
Outlook
The RBA has made clear that future decisions will depend on incoming data. The board stated 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. However, 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 appears most likely. But if the RBA is forced to move, the next step is more likely to be another increase than a cut.
