RBA on hold, rate cuts expected

The Reserve Bank of Australia (RBA) kept interest rates on hold at 4.35% at its June meeting, in line with market expectations.

"Following the three increases in the cash rate target since the beginning of the year, financial conditions are now tighter than they were, and there are signs that the economy is slowing as expected," the RBA said.

"But inflation is still too high and the board judged that it was appropriate to leave the cash rate target unchanged while it assesses the response to previous interest rate rises and the impact of the oil supply disruption."

The RBA said it will continue to be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions.

"In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand and the outlook for inflation and the labour market," it said.

"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."

Commonwealth Bank head of Australian economics Belinda Allen said a hawkish tone was maintained on the inflation side of the mandate at the same time growth was acknowledged to be slowing as expected.

"The key line of inflation risks being tilted to the upside was removed in the statement but in the press conference governor [Michele] Bullock did note inflation concerns and risks were still present. There was also a focus on a plausible scenario where inflation is higher and activity lower than the May forecasts, largely dependent on the path of the Middle East conflict from here," Allen said.

"At this stage we expect the RBA to remain on hold for the remainder of 2026 based on our forecasts for inflation and activity from here. But acknowledge the risks in the near term still sit to the upside. We continue to expect two rate cuts in 2027 based on our economic outlook with cuts in May and August 2027."

HSBC chief economist Paul Bloxham said the RBA appears to be in "wait and see" mode.

"Waiting to see the full impact of the tightening already delivered and of the other shocks to the economy - including the Middle East conflict and recent Federal budget tax changes - on growth and inflation," Bloxham said.

"We find it interesting that the statement essentially suggests that the extent of the slowing in growth is largely as the RBA had been expecting.

"Our own central case is that growth is already weaker than the RBA is assessing, and that this will keep the RBA from hiking further."