A hawkish hold by the RBA

Overview

• As widely expected, the Monetary Policy Board voted this week to leave the cash rate target unchanged at 4.35%. The vote was unanimous.
• Markets are increasingly of the view that the current RBA monetary policy tightening cycle is done. If this is right, the next move in the cash rate will be down, although market pricing – and recent inflation outcomes – suggest that any easing is still some way off.
• The messaging from RBA Governor Michele Bullock was somewhat more hawkish than this, warning that inflation is still too high and the central bank remains prepared to deliver further rate increases if required.
• Monetary policy hawks and doves now both have plausible cases to make, suggesting the RBA may be entering ‘watch and wait’ mode.

In the same week that saw Washington and Tehran sign an interim deal and announce a 60-day extension to the 8 April 2026 ceasefire, the RBA’s Monetary Policy Board (MPB) voted unanimously to leave the cash rate target unchanged at 4.35%. As was the case with last month’s 25bp rate hike, this month’s decision had been expected by the market. In the post-meeting assessment of that earlier meeting, we’d noted that May’s delivery of a third consecutive rate hike should have bought the central bank some time before requiring it to make another policy adjustment. That has proved to be the case, with this week’s accompanying statement noting that ‘the Board judged that it was appropriate to leave the cash rate target unchanged while it assesses the response to previous interest rate rises and the impact of the oil supply disruption.’

The same statement also noted that, after ‘the three increases in the cash rate target since the beginning of this year, financial conditions are now tighter than they were, and there are signs that the economy is slowing as expected.’

Indeed, given rising hopes that the worst-case scenario of an extended Middle East conflict will now be averted, plus some recent signs of weakness in the domestic economy, financial market pricing had already started to shift before the MPB meeting, indicating that markets think the RBA’s latest tightening cycle might be done. Likewise, ahead of this week’s meeting some central-bank watchers had made the case that the next rate move, when it did arrive, was likely to be down. (Recall that at the time of the May Statement on Monetary Policy, the RBA’s forecasts had assumed a cash rate trajectory based on market pricing that saw the policy rate increase from 4.2% in the June quarter to 4.7% in the December quarter.)

Given this context, the delivery of Tuesday’s announcement of a policy hold came across as moderately on the hawkish side. True, Governor Bullock did confirm in her regular post-meeting media conference that the Board did not consider the case for a rate hike this week. So, any ‘hawkishness’ should certainly not be overplayed and another rate increase is not locked in. Even so, the messaging was reasonably clear. This week’s statement emphasises that ‘inflation is still too high’ and closes with the observation:

‘…the Board is focused on its mandate to deliver price stability and full employment. It will do what it considers necessary to achieve that outcome, including increasing the cash rate target further if required.’ [emphasis added]

Again, in her opening remarks at the post-meeting media conference, Governor Bullock stressed:

‘I want to be very clear that inflation remains too high… Today’s decision does not rule out further tightening in monetary policy if that is what is required to bring inflation down.’

And later, in response to a question asking whether risks to inflation were no longer tilted to the upside:

‘No, I wouldn’t say that. I would say the Board are still concerned and if you read the statement, and particularly the last sentence in the statement it says, if we need to increase again we will…we still think that there are risks to the upside because, two reasons, one, we already had an inflation problem before the conflict started. And two, we’ve had an increase in fuel prices and other prices, other commodities and so on, which we are seeing it feed in in second-round effects. So they’re the two reasons I think we still need to be concerned and watching inflation.’

The hawks’ case

The RBA can point to several factors in support of its caution about the inflation outlook and the persistence of upside risks.

First and perhaps most obviously, annual rates of headline (4.2% as of April) and underlying inflation (3.4% using the new monthly CPI series or 3.4% in the March quarter using the old measure) remain uncomfortably above the 3% top of the RBA’s inflation target band. Note also that the average rate of headline inflation since the March quarter 2020 currently stands at around 3.7%. Hence the repeated admission/warning from Martin Place that, indeed, ‘inflation is too high.’

Second, there are still signs of ongoing cost pressures. For example, the April 2026 NAB Monthly Business Survey had reported a sharp acceleration in purchase cost growth, which had spiked up from an already elevated 2.8% in March 2026 (quarterly equivalent terms) to 4.5% in April. The latest May 2026 survey does show this rate slowing to 2.6% last month, but that rate of growth still suggests ongoing cost pressures from the conflict in the Middle East. This week’s MPB statement notes that there ‘are signs that some firms experiencing cost pressures are increasing the prices of their goods and services and others are looking to do so.’

Finally, broader macro indicators remain at levels that the RBA thinks are likely inconsistent with inflation at target. Recall, first quarter GDP growth ran at an annual rate of 2.5%. That’s above the RBA’s estimate for potential growth of around 2%. Likewise, at April’s unemployment rate of 4.5%, the central bank still thinks the labour market is a bit too tight. Quoting again from the media conference:

‘Well, at 4.5 even though it’s higher than we were sort of expecting we still think the labour market is a bit tight at that level.’

The doves’ case

So, why are markets (at least at the time of writing) increasingly of the view that the RBA’s policy tightening cycle is over? Part of the story is undoubtedly the shifting circumstances around the Iran war, where news of the latest agreement sent world oil prices tumbling, and where the headlines are even beginning to speculate about a possible oil supply glut next year.

Still, the developments in the Persian Gulf would not, on their own, likely be sufficient to change the RBA’s calculations. For a start, the durability of the current agreement remains uncertain. But more fundamentally, and as the RBA Governor reminded her audience this week, the war is not the full story when it comes to inflation. Australia’s central bank was already ‘dealing with capacity pressures before the conflict started.’ Or as she put it later in the same conference:

‘…we already had an inflation problem before the Strait of Hormuz…If [an opening of the Strait] comes to pass and over the next few months we start to see oil prices settle down and we start to see supply chains and other commodities start to work properly again then that will help, I think, to ensure that inflation doesn’t get super charged but we still have to make sure that the inflation problem we had prior to the conflict, that that is addressed. That’s really what the recent tightening has been about.’

So for the dovish case to gain traction at Martin Place, it would additionally require some combination of less upside risk to inflation and/or more downside risk to activity.  What does the supporting evidence on this side of the argument look like?

First, it’s worth recalling that some of those recent data releases just discussed above did print weaker than expected. The consensus forecast had April’s annual rate of CPI inflation at 4.4% instead of the actual 4.2% outcome, for example.  Similarly, the market had expected April’s unemployment rate to print at 4.3%, not the actual 4.5% result. The consensus had also anticipated a monthly rise in employment of 15,000 rather than the actual fall of 18,600.

Second, there have been some signs that capacity pressures in the economy could be easing. While the overall rate of real GDP growth may have indicated speed limit problems when set against the RBA’s measure of supply-side potential, for example, there were also signs of weakness to be found in the detail of the national accounts, as the quarterly pace of growth slowed from 0.9% to 0.3% and as real GDP per capita shrank by 0.1% over the quarter. In addition, according to the latest NAB business survey, another monthly fall in the reported rate of capacity utilisation means that this indicator has now dropped below 82% for the first time in a year.

Finally, there are other signs of growing economic fragility. Recent consumer sentiment readings have been extremely weak, for example. The June 2026 result for the Westpac-Melbourne Institute Sentiment Index was among the lowest in the series’ 50-year history.

The housing market is another area starting to show signs of strain as it faces multiple headwinds ranging from poor affordability indicators and slowing population growth to the impact on investor sentiment of three RBA rate increases and now Budget 2026’s changes to negative gearing. Cotality’s national Home Value Index flatlined in May 2026 while the Combined Capitals Index fell 0.1% over the month, dragged lower by falls in Sydney (down 0.9%) and Melbourne (down 0.8%).

A watch and wait brief for the MPB

This balance of hawkish and dovish arguments is supportive of this week’s decision by the MPB to remain on hold. Furthermore, it also suggests that – conditional on future developments in the Persian Gulf and on the domestic data front – the Board may now have returned to ‘watch and wait’ mode for a longer period than just the June meeting. 

Further reading and listening

• The government has announced changes to some of the tax measures announced in Budget 2026 including an increase to the turnover threshold from $2 million to $10 million for the existing small business 50% active asset CGT reduction, together with an exemption from the 30% minimum tax for income from all types of testamentary trusts. Via Treasury, Canberra is also releasing a consultation paper on the design of a 50% CGT discount for early-stage investors.
• The latest RBA Chart Pack.
• Also from the RBA, a Bulletin article on geopolitical risk and financial stability and a related speech on geopolitics and the financial system.
• The PBO is introducing a new series of Policy Costing Analyses. The first batch of three comprises analyses of: increasing defence spending by 1% of GDP over the decade to 2036-37; increasing the rate of GST from 10% to 15%; and reducing the fuel tax credits rate by 25%.
• New ABS data on Australia’s population as of the December quarter 2025, plus accompanying essays explaining the concept of population physically present in Australia and why it is important to use Net Overseas Migration statistics to understand overseas migration, and not data on overseas arrivals and departures.
• For the e61 Institute, Guy Debelle analyses the three prices that will shape the next phase of the Australian economy.
• Productivity Commission Chair Danielle Wood has an essay on the red tape impulse that makes the important point that regulations reflect social preferences and our changing social risk appetite.
• The June 2026 quarterly productivity bulletin examines productivity in the electricity industry.
• How to fix Australia’s skilled migration via a better points test (Breunig and Varela).
• Grattan’s Sam Bennett on the trouble with Budget 2026’s NDIS reform package.
• The IMF’s Kristalina Georgieva on global economic resilience in the face of the Iran war (so far).
• From the IEA, Global Energy Review 2026 and highlights from the Agency’s latest oil market report.
• How China helped save the world economy from the Iran war (WSJ).
• A new measure of global trade policy activity finds a rising trend of policy activity, an increase in restrictive measures relative to facilitating ones, and a sequence of event-driven peaks.
• The latest BIS Quarterly Review.
• An FT Big Read on the insurance industry asks, if the world is more dangerous, why is risk cheaper?
• Think tank Ember reckons that April 2026 marked the first time that wind and solar combined generated more electricity than gas worldwide. Note that coal is still in first place.
• An interesting OECD working paper on the federalism of scale.
• How China is training a robot future.
• The Economist magazine bids farewell to the monoculture, arguing that digital technology has combined with industry economics to promote more local content, from music to TV shows.
• Neat graphical story from the WSJ visualising what a trillion dollars looks like.
• Bloomberg’s Trumponomics podcast explains why oil didn’t hit US$200/b.
• The FT’s Unhedged podcast offers some notes from the FT Global Bond Summit.