The Reserve Bank has left interest rates on hold, warned house prices have further to fall, and said consumer spending will slow, although the central bank said investing in data centres will boost the business sector.
The RBA board’s nine voting members unanimously agreed to leave the cash rate on hold at 4.35 per cent yesterday. It stressed that it would not hesitate to raise the cash rate again later this year if inflation – currently 3.8 per cent – showed no sign of returning sustainably within the RBA’s 2 per cent to 3 per cent target band.
The board didn’t discuss cutting rates, Reserve Bank Governor Michele Bullock said, and it will look at a range of data on inflation, growth and employment in coming months before deciding its next move. The RBA also warned “historically weak” productivity growth continued to hold the economy back.
The slowdown in the housing market, which the bulk of the major banks now think will be in the ten per cent range across the country, and more in Sydney and Melbourne, will help bring inflation down, as households pull back on spending and developers defer projects.
On the RBA board's decision to leave rates on hold, and why she believes another hike could still be on the way.
“The balance of risks suggests that there's probably more upside risks to inflation than downside. And yes, parts of the economy have slowed, but there are still quite a bit of inflationary pressures in parts of the construction market, housing, rents. The NAB business survey that we got this week actually shows a lot of price pressures for labour costs. So we are still to get the flow through from that minimum wage decision that was announced a few months ago. Wage pressures are probably going to be even worse in the next few months.
I still think that the risks are there for another rate rise. It could happen in September or November, but I do still think that we get another one this year. I just don't think the current settings are enough to get inflation down to where the RBA thinks it's going to be, which is ultimately at two and a half per cent. That's their target.”
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Federal Trade Minister Don Farrell has lobbied his US counterpart Jamieson Greer over Donald Trump’s decision last month to impose a 12.5 per cent tariff on Australian exports to the US.
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Fear-o-meter
Kellie Wood, head of fixed income, Schroders
"The RBA has blinked - not by cutting rates, but by making another hike look much less likely. This was a hold with a dovish edge. The Board is still talking tough, but the forecasts suggest it is increasingly confident policy is already restrictive enough to finish the job.
"The tell is in the numbers. The RBA now has trimmed mean inflation averaging 2.4 per cent in 2028 - back around the middle of the target band - while unemployment rises to 4.8 per cent. That means the Bank thinks the hard work has largely been done.
"The next battleground is no longer just inflation; it is demand. Inflation may stay sticky for now, but the RBA’s own forecasts show it expects a cooler economy and softer labour market to do the heavy lifting from here.
"One more hike remains a risk, but it is no longer our central case. We think the RBA is done. The message for markets is clear: rates may not go higher, but they are not coming down quickly either. This is the higher-for-longer phase - policy stays tight until domestic demand slows enough to drag inflation decisively back to target."
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