Australia Interest Rate

The Reserve Bank of Australia kept its cash rate unchanged at 4.35% in a unanimous decision at its June meeting, in line with market expectations, as the effects of the three increases earlier this year continue to feed through the economy. The Board noted that financial conditions are now tighter than before, with signs that economic activity is slowing. Nonetheless, policymakers warned that inflation remains elevated, extending the material pickup seen in H2 2025, driven by stronger capacity pressures and higher fuel and commodity prices linked to the Middle East conflict. While oil prices have eased recently, they remain above pre-conflict levels, with evidence of pass-through to goods and services. Meanwhile, labour market conditions are mixed, with higher unemployment in April but other indicators of labour market health proving more resilient. Business investment also remains solid, and credit is readily available.

Policymakers in Australia remained concerned about persistently high inflation, which had already been running well above target before the Middle East conflict began, minutes from the Reserve Bank's May meeting showed. The war’s impact on fuel costs further clouded the outlook, lifting headline inflation in March and likely again in the June quarter. Staff projected underlying inflation above 3% until late 2027, returning to the midpoint only by mid-2028. Board members weighed a 25bp hike against holding steady. Arguments for tightening stressed strong capacity pressures, and that financial conditions were “not sufficiently restrictive”. Concerns also centered on inflation expectations becoming “de-anchored” if elevated prices persisted. The case for pausing pointed to risks that conditions were already tight and that prolonged conflict could sap growth and labor demand. Most members judged inflation risks had risen, concluding the 4.1% cash rate might not be enough to contain them.

The Reserve Bank of Australia is increasingly wary that surging energy costs could quickly spill into broader consumer prices amid persistent capacity constraints and domestic cost pressures, assistant governor Sarah Hunter said in a speech on Tuesday. She added that these risks underpinned the central bank’s third rate hike this year to 4.35%, fully reversing 2025’s easing. Hunter added that the recent jump in oil prices was “particularly challenging,” warning that higher crude would inevitably lift business costs and consumer prices, with pass-through “faster and more extensive,” risking inflation expectations drifting higher. Hunter cautioned that the Iran war could prolong elevated oil prices and trigger wider supply disruptions, adding to inflationary pressures. Still, she noted inflation could ease if households cut spending and businesses scale back investment more sharply than expected.