RBA has room to pause after May rate hike

The Reserve Bank’s decision to lift the cash rate by a quarter of a percentage point has given policymakers room to pause and assess how the economy evolves from here, CBA economists say.

The Reserve Bank Monetary Policy Board raised the cash rate by 25 basis points to 4.35% at its May meeting, delivering a widely expected increase that marked the third consecutive rate hike this year. The accompanying statement and press conference signalled that interest rate settings were now high enough to give the Board scope to pause and monitor economic developments.

CBA Head of Australian Economics Belinda Allen said guidance from the Reserve Bank post the meeting reinforced the view that its policy settings are likely to remain unchanged for the rest of 2026, although risks sit towards another rate increase.

“The RBA press conference reiterated that the Board now has space to monitor the economic impact of the conflict in the Middle East, and this reaffirms our view that the RBA will now be on hold for the remainder of 2026,” Allen said.

Inflation remains the central concern

Even so, inflation and inflation expectations remain the key focus for the RBA Board, with the probability that inflation increases still more likely than a fall.

Price pressures from within the Australian economy were already high at the start of 2026, Allen said, and the conflict in the Middle East has only added to inflationary pressures by pushing energy costs and other prices reliant on energy higher. Even with recent interest rate increases, inflation will remain above target for some time while growth is expected to slow.

Interest rates are now a little more restrictive, with the cash rate above the level that should put the brakes on growth. But a high degree of uncertainty remains given the conflict in the Middle East. There are risks to both the inflation and growth outlook from here. “A further rate hike cannot be ruled out, depending on the data,” Allen said.

Key watchpoints from here

Allen said upcoming economic data will be critical in shaping the outlook for monetary policy.

“Economic outcomes will dictate the path of policy,” she said. “The key things to watch are federal and state budget outcomes, wage decisions, consumer spending and the June quarter inflation data.”

CBA data shows Australian consumers have remained relatively resilient to date. While there are some early signs of a pullback in spending in areas like travel and selected discretionary categories, there is limited evidence so far of a broad slowdown in spending, despite overall weak consumer sentiment.

Rates expected to remain on hold

Despite those risks, CBA’s central hypothesis is for a period of stability in interest rates.

“From here we do see a period of ‘on hold’ from the RBA, depending on economic outcomes and global developments,” Allen said.

More broadly, CBA economists expect economic growth to slow below trend through 2026 as higher interest rates and cost‑of‑living pressures weigh on household spending and employment growth moderates. That cooling in demand is expected to gradually ease inflation pressures.

Looking further ahead, CBA’s base case assumes the cash rate remains on hold for the remainder of 2026, with the potential for rate cuts emerging in 2027 if inflation continues to move back towards target and spare capacity opens up in the labour market.