RBA in ‘pause mode’, expected to keep rates unchanged
The Reserve Bank of Australia’s Monetary Policy Board is expected to hold the policy interest rate unchanged today, as they wait to see the full impact of previous decisions.
This would keep the cash rate at 4.35%.
Associate Professor Tim Robinson says interest rate changes affect the economy in numerous ways. Some of these are relatively quick, such as movements in the Australian dollar exchange rate, whereas others are slow. This means it’s too early to fully see the impacts of the RBA’s previous rate increases.
“Growth in the Australian economy in the March quarter was soft and narrowly based. We expect the RBA Monetary Policy Board to pause this month. This would give them more time to observe the impacts of the past interest rate increases and to further assess the consequences of the conflict in the Middle East on Australian economic growth.”
“However, a hold now does not mean that we’re at the end of the tightening phase of interest rates. It’s highly uncertain. While growth was soft, and may weaken further, underlying inflation, which the RBA focuses on, remains elevated.”
“One important aspect the RBA will be monitoring is developments in inflation expectations. If high inflation becomes built into inflation expectations, it can lead to even higher inflation. Encouragingly, the Melbourne Institute’s measure of consumer inflation expectations eased slightly in June but remains high.”
The Melbourne Institute expects this combination of weak growth and high inflation to persist for the rest of the year. It will be a challenging environment for Australian households and businesses. “Living standards of Australians, as measured by output per capita, declined in the March quarter, and further declines are likely”.
Another key aspect of the economy that the Reserve Bank will be monitoring going forward is developments in the labour market. Recently, these have been very mixed, with the unemployment rate moving higher in April. However, at 4.5 per cent, it is not high by historical standards. The extent to which the likely weak output growth over the remainder of 2026 translates into further increases in the unemployment rate is uncertain. How this unfolds may influence future interest rate decisions.
Associate Professor Tim Robinson is available for interview.