As markets largely expected, the Reserve Bank of Australia (RBA) has left the cash rate unchanged at 4.35% in its August meeting. The unanimous decision follows June’s hold and comes after three consecutive rate hikes earlier this year, which lifted the cash rate by a total of 75 basis points.

 

The move is in line with Westpac Economics' revised forecast that the central bank would not hike rates in August and is unlikely to raise rates again this year.

 

Despite holding rates steady, the RBA remains hawkish, signalling that more work is needed to return inflation to its target band of 2-3 per cent.

 

Inflation remains a key concern

 

The Board’s post-meeting statement suggests earlier rate rises are having their intended effect of tightening financial conditions.

 

Consumer spending growth is slowing gradually, with recent Australian Bureau of Statistics (ABS) data showing headline inflation eased more than anticipated to 3.8 per cent in the year to June, down from 4.0 per cent in May.

 

While this is a positive sign, the RBA is concerned underlying inflation is still too high. RBA Governor Michele Bullock said the Australian economy continues to operate above capacity, while global growth has been stronger than expected, supported by investment linked to artificial intelligence.

 

Oil and commodity prices, which “remain higher than they were prior to the Middle East conflict”, are also cited as a key concern adding pressure across parts of the economy, potentially slowing progress back to target.

Bullock also pointed to the labour market remaining somewhat tight, despite recent signs of easing. This is reflected in recent ABS Labour Force data, which showed unemployment held at 4.4 per cent in June, indicating demand for workers remains resilient.

 

Luci Ellis, Westpac Chief Economist, said policymakers would be paying close attention to labour market conditions, describing it as “a key driver of its inflation outlook.”

 

With this in mind, the RBA will remain on alert, projecting that inflation is “not expected to return to around the midpoint of the target range until late 2027.”

 

Ellis noted that a rate hike in November cannot be ruled out if inflation picks up over the coming months.

 

The RBA’s statement echoes this, warning that “the Board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if upside risks materialise.”

However, Ellis said the central bank expects economic growth to slow further as previous rate rises continue to flow through the economy.

 

"The RBA is looking for a period of slower growth to help ease inflation pressures, and its forecasts suggest the economy is currently on track to deliver that outcome," she said.

 

“We continue to expect the RBA to remain on hold through to mid next year. However, it will be a ‘hawkish hold’,” Ellis added.

 

What the decision means for housing

 

Today's decision means borrowers will avoid an immediate increase in home loan repayments, providing some short-term certainty for households already grappling with the effects of three previous rate rises and ongoing cost-of-living pressures.

 

"I know that these increases have been tough for households with mortgages, who are also facing high inflation. But they were necessary," Bullock said.

 

Bullock noted that conditions in the housing market have eased. Softer housing activity can help cool demand across the broader economy and reduce inflation pressures over time, but the RBA made it clear the fight against inflation is not yet over.

 

While a hold will be welcomed by mortgage holders, the prospect of further rate rises means borrowing costs are likely to remain higher for longer.

 

The road ahead

 

The next few months will be critical. Policymakers will be closely watching inflation data, labour market conditions and consumer spending for evidence that previous rate rises are continuing to slow demand and ease price pressures.

 

Until there is greater confidence inflation is moving sustainably back towards the 2-3 per cent target range, the RBA appears content to keep borrowers and markets on notice.