The Reserve Bank of Australia has held the cash rate at 4.35 percent for a second consecutive meeting but warned that further tightening remains on the table if inflation proves sticky.
Business & Markets Desk is a contributing writer covering business and public affairs for The Sydney Times.
The Reserve Bank of Australia has held the cash rate at 4.35 percent for a second consecutive meeting, breaking the run of rate hikes that had characterised the first half of 2026 but signalling that further tightening remains on the table if inflation proves sticky. The unanimous decision at the August 2026 meeting, following a similar hold in June, reflects a board that is torn between the need to bring inflation back to its 2 to 3 percent target band and the risk that additional tightening could push the economy into a sharper slowdown than it desires. Governor Michele Bullock was explicit in her post-meeting statement: the board did not consider hiking rates in August, but it remains ready to increase again if upside inflation surprises emerge.
The RBA's rhetoric is hawkish relative to market expectations, which had priced in a 50 percent probability of a rate hike in September and almost 100 percent probability by November, according to the Statement on Monetary Policy published in August 2026. The pricing reflects stronger-than-expected inflation data in July, particularly in market services and housing, which have been the stickiest components of the CPI basket. The RBA's concern is that these sectors are passing through higher costs to consumers faster than expected, which could entrench inflation expectations and make it harder to return to the target band without additional tightening.
The RBA's monetary policy is transmitting through the housing market, which is now showing clear signs of stress. The National Australia Bank revised its cash rate forecast in June 2026, concluding that the RBA's next move will be a cut rather than a further hike, but not until the second half of 2027. NAB chief economist believes the cash rate will peak at 4.35 percent for the cycle and then fall to 3.6 percent by the end of 2027. The revision was driven by data showing that mortgage applications have fallen 15 to 20 percent year-on-year, with especially large falls in new applications by investors, and that housing turnover has declined sharply as higher borrowing costs price out first-home buyers and upgraders.
The housing market is a key risk to the RBA's outlook because falling house prices and weak turnover reduce household wealth and consumer confidence, which feeds through to lower consumption and lower inflation. The RBA is not alarmed by the unemployment rate rising to 4.5 percent, which is above the 4 percent level that the bank considers consistent with full employment, but it is watching credit growth and housing market dynamics closely. The bank's concern is that a sharp correction in house prices could trigger a negative wealth effect that reduces spending faster than expected, which would be a shock to an economy that is already growing below trend.
The Australian Retail Council reported that retail spending reached $40.13 billion in July 2026, up 6.1 percent compared with the same month last year, but the growth was driven primarily by price increases rather than volume growth. The underlying growth in real terms is modest, according to ARC chief economist Glenn Fahey, because headline inflation is running at 3.5 percent and underlying inflation at 3.6 percent. Once inflation is taken into account, the real growth in retail spending is barely positive, which suggests that consumers are still feeling the pinch of higher prices even as nominal spending figures look strong.
The KPMG Australia Retail Health Index dropped to -1.07 in the three months to June, down from -0.39 in the prior quarter, signalling a broad-based deterioration in retail sector performance including consumer confidence, spending volumes, cost pressures, and labour market conditions. The index has moved into negative territory for the first time since the 2020 recession, which is a warning sign for the RBA that consumer demand is weaker than the headline spending figures suggest. The deterioration is concentrated in discretionary spending categories, including clothing, footwear, and household goods, while spending on essentials including food and fuel remains relatively resilient.
The RBA's next decision will be closely watched for signals on the future path of interest rates. A hold with a hawkish tilt would likely extend the current uncertainty, which is weighing on business investment and consumer confidence. A dovish surprise, in which the board signals that it is more concerned about the housing market than about inflation, would be interpreted as a signal that the next move will be a cut rather than a hike. Betashares chief economist David Bassanese believes the RBA will leave rates on hold for the remainder of 2026, with one rate cut pencilled in for the first six months of 2027. The view is predicated on the assumption that inflation will continue to ease gradually as the lagged effects of past rate hikes feed through to the economy.
The RBA's dilemma is that it cannot easily signal a pivot without risking a resurgence in inflation expectations, and it cannot maintain the hawkish stance without risking a sharper slowdown in the housing market and consumer spending. The bank's preferred path is to hold rates steady for as long as necessary to bring inflation back to target, while standing ready to cut quickly if the economy shows signs of excessive weakness. The challenge is that the lag between monetary policy action and its effect on inflation is long and uncertain, which means the board is making decisions based on forecasts rather than current data. The uncertainty is unavoidable, but it is creating anxiety for borrowers, businesses, and investors who need to plan for an interest rate environment that is still evolving. Read more economic analysis at the Business & Markets hub
RBA monetary policy statements and cash rate decisions are published at the Reserve Bank of Australia. NAB economic forecasts are available at NAB Economics.
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The RBA holds the cash rate at 4.35% until its September 29 decision, with economists divided on whether the hiking cycle has ended or one more increase is coming before cuts begin.
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