Why the RBA is happy to play a waiting game

The Reserve Bank of Australia (RBA) is in no rush to raise interest rates again, but its latest Board minutes make clear it is not ready to declare victory over inflation either.

Minutes from the RBA’s June monetary policy meeting, where the Board unanimously left the cash rate unchanged at 4.35%, show a central bank content to sit tight while earlier rate rises work their way into the economy.

The Board retained the option of another increase, but Commonwealth Bank Head of Australian Economics Belinda Allen said there was “minimal indication” a rate rise was imminent.

Allen said the June minutes confirmed the RBA was in “wait and see mode for now”, arguing that the Board’s earlier run of rate increases had given it scope to remain patient and assess incoming data.

CBA expects the RBA to stay on hold for the rest of 2026, although Allen said there was still a lingering possibility of another move later this year if inflation proved more persistent than expected and the economy more resilient.

Conditions becoming tougher

The RBA’s minutes also note financial conditions in Australia had become tougher since the start of the year after three increases in the cash rate target. RBA Board members agreed those conditions were now “probably somewhat restrictive” — in other words, high enough to be putting the brakes on activity.

Housing conditions had softened, housing credit growth looked set to slow and scheduled mortgage payments had risen as banks passed on higher rates.

Allen said these factors gave the RBA room to pause and assess, pointing to the Minutes’ assessment that earlier rate rises appeared to be broadly having the expected effect, particularly in housing, where conditions had eased by more than expected.

The RBA Board itself said it would take time to assess the full impact on the economy of the rate increases since February, but judged that, at this stage, they appeared to be working broadly as expected.

Housing demand had eased, while the broader economy appeared to be slowing in line with earlier forecasts, it noted. 

“Taking these considerations together, members judged that there was merit in using the space provided by the Board’s earlier decisions to raise the cash rate target to assess how the economy was adjusting and the impact of disruptions to oil supply,” the minutes say.

RBA holds its nerve

The minutes show inflation remains the Board’s main concern.

Members said information received since the previous meeting supported the view that the economy was operating with “excess demand and widespread inflationary pressures”.

Inflation was still “materially above” target, with underlying inflation expected to rise in the June quarter. Labour and non-labour cost pressures were also described as widespread.

The Board said it would do what was necessary to achieve price stability and full employment, “including increasing the cash rate target if necessary”.

Still, Allen said there were no new developments in either the data or the Board’s language to suggest the RBA was about to depart from its current wait-and-watch approach.

Market pricing was broadly consistent with that assessment, with the minutes noting a 50% chance of another 25-basis point interest rate increase by the end of 2026.

The global backdrop has also strengthened the case for waiting.

The minutes noted signs of a possible resolution to the Middle East conflict and a fall in oil prices, but the Board warned the outcome remained uncertain and that energy market disruptions could still add to inflation. Even if the resolution endured, members said global commodity supply constraints would take time to resolve.

That leaves the RBA balancing two risks. One is that inflation proves sticky, particularly if businesses pass higher energy and other costs on to customers. The other is that the economy slows more sharply than expected.

Allen said the Board appeared comfortable remaining on hold while assessing which of those forces would prove more influential.

Housing and jobs in focus 

Domestic risks are also becoming more complicated. The minutes flagged weak productivity growth as a threat to the economy’s supply capacity and warned that a material weakening in housing markets could “inhibit growth in consumption”. 

Allen said household spending remained the key risk to CBA’s view that the economy would slow and inflation would pull back more quickly than RBA estimates, particularly if stronger-than-expected household incomes limited the spending adjustment.

The labour market is part of that debate. The minutes treated April’s weaker jobs data cautiously, noting some indicators were softer than expected while others pointed to resilience. Allen said CBA suspected the Board placed little weight on the weak April numbers, but that subsequent May data suggested the labour market was cooling faster than the RBA expected.