The Reserve Bank of Australia (RBA) has left the official cash rate unchanged at 4.35 per cent, signalling it remains prepared to raise interest rates further if inflation proves more persistent than expected.
The decision, announced following the Reserve Bank Board’s meeting on Tuesday, comes after three cash rate increases earlier this year, with policymakers determining that monetary policy is already exerting a restrictive effect on the economy while they assess incoming economic data.
The Board said inflation had picked up significantly in the second half of 2025, with recent data confirming that stronger-than-expected capacity pressures within the Australian economy were contributing to higher prices.
While the inflationary impact of the conflict in the Middle East has so far been less severe than initially feared, the RBA said headline inflation remains well above its target, with underlying inflation also continuing at elevated levels.
The central bank noted that oil prices and related commodities remain higher than before the conflict, placing upward pressure on transport costs and broader consumer prices. Businesses facing higher input costs have already begun increasing prices or are planning to do so, while short-term inflation expectations, although easing, remain above earlier levels.
The Board acknowledged that financial conditions have tightened considerably following the recent interest rate increases.
Money market rates and government bond yields have risen, while the Australian dollar has appreciated. Consumer spending is beginning to slow as expected, although business investment and borrowing remain relatively strong.
The housing market is also showing signs of softening.
The RBA said housing prices have declined in some capital cities and the number of new housing loans has fallen noticeably, indicating higher borrowing costs are reducing demand.
Meanwhile, labour market conditions have eased slightly more than anticipated in recent months, although leading indicators suggest only limited further softening in the near term.
Despite these signs of slowing economic activity, the Reserve Bank warned that inflation remains its primary concern.
It said disruptions to global oil supplies continue to add directly to inflation and there is growing evidence that higher fuel costs are flowing through to the prices of other goods and services.
The Board believes inflation is now likely to remain above target for an extended period and is not expected to return to around the midpoint of the RBA’s 2–3 per cent target range until late 2027.
The RBA also highlighted significant uncertainty surrounding both domestic and global economic conditions.
While Australia’s major trading partners have so far performed better than expected, largely due to strong investment linked to artificial intelligence, risks remain if the Middle East conflict continues or global energy supplies remain constrained.
The Board warned that prolonged geopolitical uncertainty could weaken economic growth both internationally and domestically while further lifting inflation.
Domestically, the RBA said historically weak productivity growth continues to limit Australia’s economic potential.
In explaining its decision to leave rates unchanged, the Board said the economy appears to be slowing broadly as expected and monetary policy is already restrictive.
However, it made clear that inflation remains too high and that it will not hesitate to increase interest rates further if upside inflation risks materialise.
“The Board remains focused on ensuring that high inflation does not become embedded,” the RBA said.
It added that growth in aggregate demand needs to remain subdued to reduce capacity pressures and return inflation sustainably to target.
The decision to leave the cash rate unchanged at 4.35 per cent was unanimous.
The RBA said future decisions will continue to depend on incoming economic data and its evolving assessment of inflation and economic risks, reaffirming its commitment to achieving both price stability and full employment.
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