Rates on hold as the RBA balances inflation risks and slowing growth
Reserve Bank holds rates amid elevated inflation and slowing growth, balancing its dual mandate as uncertainty persists.
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Cash rate on hold. The Reserve Bank of Australia's Monetary Policy Board decided to hold the cash rate at 4.35% on Tuesday, in line with market expectations. Following three rate rises in four months, the Board has opted to pause, allowing earlier tightening to flow through the economy while assessing global developments.
Domestic data supports the cautious approach. Inflation was already rising prior to the escalation of conflict in the Middle East, driven by strong domestic demand and tight labour market conditions. The conflict has further compounded these pressures, with higher fuel prices adding directly to inflation. The length of the conflict has meant that there are early indications that these international pressures are beginning to pass through to broader goods and services prices.
The RBA’s most recent Statement on Monetary Policy, released in May, highlights the expectation that inflationary pressures may still rise, with underlying (trimmed mean) inflation expected to peak at 3.8% in the June quarter 2026 – up from 3.3% in March 2026.
On the other side of the Reserve Bank's dual mandate, there are increasingly evident signs of softness in economic activity. National Accounts data for the March quarter revealed subdued growth, while labour market conditions are also beginning to ease. The unemployment rate rose to 4.5% in April – its highest level since the COVID-19 pandemic. Measures of business and consumer confidence have also weakened, pointing to a heightened risk of slower spending in the months ahead.
Rising inflation and an economy that is losing momentum are two uncomfortable facts that bring the Reserve Bank’s dual mandate into sharper focus. Price stability requires monetary policy to remain tight enough to bring inflation sustainably back to the 2-3% target band. However, full employment requires the Reserve Bank to avoid putting unnecessary pressure on an economy that is already weakening. If these trends persist, the Reserve Bank is lined up to face an increasingly complex trade-off.
Note: data is quarterly from June 2016 to June 2028. Forecasts (blue) taken from May 2026 RBA Statement on Monetary Policy. NAIRU assumed to be 4.3%. Inflation target is 2.5%. Trimmed mean inflation shown as 12-month change.
Adding to the degree of difficulty is the unusually opaque outlook. While renewed ceasefire prospects in the Middle East offer some potential for easing energy prices, the outlook remains highly contingent on geopolitical developments and continues to pose an ongoing source of uncertainty for inflation and growth.
At the same time, the likely reinstatement of the full fuel excise from 1 July risks adding another layer of noise to the inflation data. A subsequent uptick in inflation would therefore at least partially be a policy-driven increase rather than a sign of stronger domestic demand, but it would still matter for headline inflation, household budgets and inflation expectations.
That leaves the Reserve Bank with little choice but to wait for clearer evidence. A hold on Tuesday gives it more time to assess how earlier rate increases are flowing through households, businesses and the labour market, while keeping its options open for future meetings.
Soft growth alone will not be enough to justify rate cuts while underlying inflation remains above target, and domestic cost pressures remain elevated. As the Monetary Policy Board said in its statement today, it will lift rates “further if required.” With the re-acceleration of inflation in the second half of 2025 still fresh, the Board will have little appetite for signalling an early end to tightening. Another rate hike later in 2026 remains on the table.
Against this backdrop, Deloitte Access Economics expects one further increase in the cash rate before the end of 2026.
This newsletter was distributed on 18th June 2026. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Adelle Thomas (Graduate Economist, Deloitte Access Economics)
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