RBA says higher rates are working, but inflation risks remain

Australia’s latest interest rate decision came down to a choice between raising rates again or giving the increases already delivered more time to work.

Minutes from the Reserve Bank of Australia’s 10 and 11 August meeting show the Monetary Policy Board considered lifting the cash rate by another 0.25 percentage points before unanimously deciding to leave it at 4.35%.

The board concluded that financial conditions were already “somewhat restrictive” after three cash rate increases in 2026 and there was time to see how households and the broader economy responded.

But it also made clear that another increase remains possible if inflation proves more persistent than expected.

Are higher interest rates starting to work?

There are signs the previous rate rises are having an effect.

Demand for new housing loans has fallen significantly, particularly among investors, while national housing prices were around 1.5% below their March peak at the time of the meeting.

The RBA said housing conditions had weakened by more than it expected in May, reflecting a combination of higher interest rates, weaker sentiment and tax changes announced in the federal Budget.

But the bank also put the fall in perspective.

Housing prices remained around 50% higher than at the start of the pandemic and 5% higher than a year earlier.

Broader demand in the economy had also moderated, while the labour market had eased by a little more than expected. Even so, unemployment remained low and the RBA still judged the economy to have some capacity pressures.

What does it mean for mortgage holders?

The pressure from higher rates is still building for some households.

Scheduled mortgage repayments as a share of household disposable income had risen to near their 2024 peak and were expected to increase a little further as previous cash rate rises continued to flow through.

The RBA said many mortgage holders still had sizeable repayment buffers that could help them smooth their spending if needed.

Household spending growth was slowing only gradually despite very weak consumer sentiment, with the bank assessing that most household balance sheets remained in relatively good shape.

Why is the RBA still worried about inflation?

Inflation remains the main reason the prospect of another rate rise has not disappeared.

Underlying inflation rose to 3.6% in the June quarter and the RBA expects it to remain above 3% until the middle of 2027 before easing to around 2.5% late that year.

The board said the risks around that forecast were tilted towards inflation being higher than expected.

Those risks include another increase in global oil prices if the Middle East conflict persists, businesses passing higher costs on to customers, continued weakness in productivity and stronger-than-expected demand.

Several board members considered it quite possible that some of those risks could materialise and require further tightening. Others saw greater scope for weaker economic conditions to offset them.

How does AI enter the picture?

One of the more unusual risks identified by the RBA is the global boom in AI and data centre investment.

Strong AI-related investment has already boosted growth in some Asian economies and data centre construction has contributed to stronger Australian business investment.

But the RBA said an even larger AI and data centre investment boom could also add to demand and inflation pressures, both globally and in Australia.

That leaves the board balancing two competing forces: evidence that higher rates are slowing parts of the economy against the risk that inflation proves harder to bring down.

For now, it has chosen to give the previous rate rises more time to work. But the August minutes make clear that what happens next will depend heavily on incoming inflation, jobs and housing data.