RBA holds cash rate at 4.35%, warns more hikes possible

The Reserve Bank of Australia (RBA) held the official cash rate steady at 4.35% on Tuesday, a widely expected pause after three consecutive increases earlier this year. But the central bank warned it stands ready to raise rates again if inflation risks materialise, even as it acknowledged the economy is slowing.

A widely expected pause

Economists and financial markets had unanimously predicted no change following the RBA's two-day board meeting. All board members voted to hold the cash rate, citing a need to assess how the economy is evolving. In a statement, the board said the economy appears to be slowing as expected after this year's hikes, but reiterated that it "will continue to do what it considers necessary" to bring inflation sustainably back to target, including increasing the cash rate further if upside risks emerge.

The decision comes as property prices in Sydney and Melbourne have fallen sharply, and declines are now spreading to Brisbane, Perth, and Adelaide. The RBA warned that falling house prices would slow income growth, adding another layer of complexity to the economic outlook.

Inflation still too high

The RBA noted that inflation remains elevated, at 3.8% in the year to June. It projected that headline inflation would not return to the targeted 2.5% until late 2027, and acknowledged there are upside risks to that forecast. The board said monetary policy was "somewhat restrictive" and that holding the rate would give it time to assess how the economy is responding.

Stephen Smith, a partner at Deloitte Access Economics, said the statement suggested the RBA "increasingly feels its job may be done." However, he cautioned that another rate rise in 2026 cannot be fully ruled out, given the persistent inflation risks.

Housing market and household spending

The RBA released new economic forecasts on Tuesday, predicting economic growth would steady at around 1.4% over 2026, with slightly higher population growth offset by a surprisingly heavy drop in home prices. It also forecast weaker household spending this year, as falling property values reduce household wealth and lead to fewer home sales.

ANZ economists separately predicted that capital city home prices would fall at least 5% from their peaks early this year, with Sydney expected to drop 14.5% and Melbourne 12.8%. The RBA cited research suggesting the federal budget's tax reforms alone could leave house prices up to 5% lower in the long term. Prices have risen about 5% in the past year and are up 50% since 2020.

The cooling market is already affecting lending. New home loans have slowed, with investor loan commitments in June falling by roughly a quarter compared with the start of the year, as a share of total housing credit. Westpac reported a 20% fall in home loan applications since mid-May, which it attributed to interest rate rises rather than the federal budget.

Markets and political reaction

Financial markets interpreted the RBA's stance as less hawkish than feared. The Australian sharemarket rose, while the Australian dollar and bond yields fell, suggesting traders expect lower interest rates in the future. The pause was welcomed by Treasurer Jim Chalmers, who said it would come as a relief to Australians with mortgages amid uncertainty in the global economy.

Looking ahead, the RBA's next move will hinge on incoming data, particularly inflation and the housing market. With markets now pricing in possible cuts, the central bank's hawkish tone underscores that the fight against inflation is far from over. Governor Michele Bullock is set to speak later today, offering further clarity on the bank's thinking.