The Reserve Bank of Australia has left interest rates unchanged at 4.35 per cent, opting to pause its tightening cycle for a second consecutive meeting while warning that another increase could still be required if inflationary pressures fail to ease.
The decision by the RBA’s Monetary Policy Board was widely expected by financial markets, but the accompanying message from Governor Michele Bullock was notably cautious. The central bank said it remained focused on ensuring inflation returns sustainably to its 2–3 per cent target range and indicated that monetary policy could be tightened further if necessary.
The decision comes after three consecutive 25-basis-point increases earlier this year lifted the cash rate by 75 basis points to its current level of 4.35 per cent. Those increases reversed the rate cuts delivered during 2025 and reflected renewed concerns about persistent inflation and stronger-than-expected domestic demand.
In a note to investors, AMP Capital chief economist Dr. Shane Oliver said he believed the central bank’s tightening of monetary policy is likely to continue, saying: “While the RBA left rates on hold again in August, we are continuing to allow for a further rise in interest rates with the next hike likely to come in November as underlying inflation remains too high and will likely take longer to return to target than the RBA is forecasting given various cost and demand pressures posing a high risk that inflation expectations will move higher.”
The RBA’s decision to pause has been made easier by more encouraging inflation data. Consumer price pressures eased more than expected in the June quarter, reducing some of the immediate pressure on policymakers to raise borrowing costs again.
Nevertheless, the central bank remains concerned that inflation could prove persistent.
Higher energy prices, partly associated with geopolitical tensions in the Middle East, have increased the risks to the inflation outlook.
The RBA also noted that demand in the Australian economy remains relatively resilient and that employment growth has continued to support household spending.
The housing market is providing a counterweight. There are signs that higher borrowing costs are beginning to slow activity, with auction clearance rates, loan applications and home sales weakening. The RBA will be watching closely to determine how much of the previous tightening is still flowing through to households and businesses.
The central bank’s latest forecasts suggest inflation should gradually moderate. It expects inflation to fall to about 3.6 per cent by the end of 2026 and to 2.6 per cent by the end of 2027, bringing it back within the target band.
Financial markets interpreted the decision as a pause rather than the end of the tightening cycle. Interest-rate markets increased the probability assigned to another hike, with swaps indicating roughly a 50 per cent chance of an increase at the November meeting and an approximately 80 per cent probability of a hike by early next year.
The Australian dollar was relatively steady following the announcement, trading around US70.5 cents and close to an eight-week high. The currency has benefited from the RBA’s relatively hawkish stance and expectations that Australian interest rates could remain higher than previously anticipated.
For borrowers, the decision means there will be no immediate increase in mortgage rates stemming from the RBA. However, today’s statement offers little reassurance that rates have reached their peak.
The central bank’s message is essentially one of patience. With inflation moving in the right direction but still above target, policymakers are prepared to wait for more evidence before acting — but they are equally prepared to raise rates again if price pressures prove more persistent than expected.
For financial markets and Australian households, the distinction is important. The rate-hiking cycle may have paused, but the RBA has made clear that the battle against inflation is not yet over.
Said Dr. Oliver, on the policy options to deal with persistent inflation, “The alternative would be for the government to cut its spending and/or raise taxes to help lower private spending, and this would spread the load more fairly. However, governments being run by politicians cannot be relied on to cut spending and raise taxes in times of inflation because its politically unpopular, so after chronic inflation problems in the 1970s and 1980s responsibility for its control was handed to the RBA in Australia.”
