The Reserve Bank of Australia has held the cash rate steady at 4.35 per cent, which will be a relief to mortgage holders, but some economists say the fight on inflation continues.
KPMG chief economist Dr Brendan Rynne said the cash rate pause this week is likely to be short-lived.
“With the Middle East conflict seemingly winding down and the real prospect of oil prices falling as a result, the RBA will no doubt be feeling slightly more at ease in some respects,” Dr Rynne said. “But higher diesel and fertiliser costs from the war are now flowing through and worsening food and transport prices, which will not help in the inflation fight.
“For this reason, we can expect at least another hike this year, most likely in August, in order to bring core inflation back down to the mid-point of the RBA’s target band.”
In its statement, the RBA pointed out that inflation picked up materially in the second half of 2025, and information since the beginning of this year has confirmed that some of the increase reflected greater capacity pressures.
“The latest data show that headline and underlying inflation are still too high,” the RBA statement read. “Oil prices have eased in recent weeks, although energy and most related commodity prices remain higher than they were prior to the conflict in the Middle East.
“There are signs that some firms experiencing cost pressures are increasing the prices of their goods and services and others are looking to do so. Short-term measures of inflation expectations have eased but remain higher than earlier in the year.”
The RBA also noted that financial conditions have tightened this year in response to three increases in the cash rate target.
“Money market interest rates and government bond yields have risen, and the exchange rate has appreciated,” the bank shared. “There are signs that growth in consumer spending is slowing as expected and momentum in the housing market has shifted, with housing prices falling in some capital cities.”
On top of this, the unemployment rate was higher than expected in April, while the March quarter National Accounts from the ABS reveal household discretionary spending was already stalling before the rate rises, as households cut back in order to pay for essentials.
The Australia Institute chief economist Greg Jericho said the current level of inflation has not been driven by either wages or consumer spending. Rather, he said, it’s been driven by increased profits and the war in Iran.
“For too long the Reserve Bank has punished households out of a belief that a wage-price spiral was just around the corner,” Jericho said.
“Maybe they finally get it. Maybe the RBA board members understand they’ve been unfairly inflicting unnecessary pain on mortgage holders.”
But the RBA noted that while the unemployment rate was up, other measures of labour market conditions have been more resilient. The bank reported that growth in business investment is strong and credit is readily available to both households and businesses.
“There continue to be heightened uncertainties about the outlook for domestic economic activity and inflation,” the RBA shared. “Resolution of the conflict in the Middle East is at an early stage, and there are plausible scenarios where inflation is higher and activity lower than envisaged under the May baseline forecasts.
“Global oil supply issues will take some time to resolve, maintaining upward pressure on global energy prices and inflation. At the same time, a period of prolonged uncertainty may also cause growth to be lower in Australia’s major trading partners and in Australia.”
This led the bank to hold cash rates to see how its three consecutive rate hikes will impact the economy, and to assess the impact of oil disruption.
The RBA declared that its board remains focused on ensuring inflation does not become embedded once the impulse from higher oil prices has passed through. To achieve this, the bank noted, growth in demand needs to slow to reduce capacity pressures and help bring inflation to target.
Monetary policy is well placed to respond to developments and the Board is focused on its mandate to deliver price stability and full employment. It will do what it considers necessary to achieve that outcome, including increasing the cash rate target further if required.
Dr Rynne from KPMG said given the current productivity gap, unemployment rate, wage pressures, and the outlook for public sector spending, the messaging from the RBA has been clear and consistent: “Inflation remains too high in Australia and the current levels of aggregate demand are at least maintaining, or more likely, pushing core inflation even higher.”
“The RBA is acutely aware of the delicate balancing act that is playing as it could risk driving unemployment higher, but taming inflation appears to be its top priority above all else,” Dr Rynne said.