Paused but Poised

The Board kept interest rates at 4.35%. It was unanimous.

Governor Michele Bullock is feeling quietly confident. After three-consecutive rate rises, monetary policy appears to be just right. Economic growth, unemployment, and inflation are moving in the right directions and are inline with the RBA’s forecasts.

The war in the Middle East is the wildcard, but if the new ceasefire agreement holds and graduates to a proper peace agreement, the price of fuel could fall further and stay down.

At this juncture, Bullock and the Board believe they have done what was needed and can now wait and see until their next meeting in August. At which point, they will be armed with new information and forecasts.

What the RBA’s statement said

“Oil prices have eased in recent weeks, although energy and most related commodity prices remain higher than they were prior to the conflict in the Middle East.”

“Higher fuel prices have added directly to inflation, and there are indications that this is passing through to the prices of other goods and services, so inflation is likely to remain high for some time.”

“Short-term measures of inflation expectations have eased but remain higher than earlier in the year.”

“There are signs that growth in consumer spending is slowing as expected and momentum in the housing market has shifted, with housing prices falling in some capital cities.”

“Growth in business investment is strong and credit is readily available to both households and businesses.”

“Monetary policy is well placed to respond to developments, and 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.”

https://www.rba.gov.au/media-releases/2026/mr-26-15.html

What the governor said at the media conference

“Leaving rates on hold today will allow the Board to assess how these previous increases are flowing through the economy.”

“The other point I would make is that underlying inflation is actually pretty much dead on where we thought it would be.”

“The national accounts came out pretty much as expected for us. Trim mean inflation looks pretty much where we thought it would be. The unemployment rate is a little bit higher than we thought, but we’ve got another set of forecasts to be done in August so you’ll know then.”

“We are not forecasting a recession. We are forecasting that growth has to slow.”

“We expected [unemployment] to increase because we need the labour market to ease a bit because that is part of capacity pressures that is increasing inflation in the economy.”

“If you wait until you see it. You might be too late, And I think that was sort of the conclusion when inflation exploded in 2022-23. We waited until we saw it and then it was too late. Part of the easing process in 2025 was recognising that things seemed to be going in the right direction”.  

In a better place

“We are in a better position than we were at the beginning of the year when interest rates were three-quarters of a percentage point lower.” Michele Bullock, monetary policy decisions - media conference, 16 June 2026.

The RBA cut rates early last year as inflation fell back into the target range. But in the second half of the year, the RBA was surprised by the resilience of domestic demand and underlying inflationary pressures. By the time it realised it had to raise rates again, it had some ground to make up. It took until last month’s rate rise before the Board felt like it had caught up. Now, the RBA feels that interest rates are just right.

There is still more bang from the three rate rises to flow through the economy, and the RBA now has scope to cut rates quickly if needed.

Time will tell if they needed to raise rates as fast and high as they did, but so far so good.

Key measures are as expected

At first blush, key economic data over the last month appears mixed. Unemployment increased from 4.3% in March to 4.5% in April (seasonally adjusted) and quarterly economic growth fell from 0.9% in the December quarter to 0.3% in March. In contrast, headline inflation decreased from 4.6% in March to 4.2% in April (see chart below). The trimmed mean increased slightly from 3.3% to 3.4%.

Source: AFR

The RBA would welcome all the results above. The RBA is happy to see unemployment increase a little as it suggests that the still too-tight labour market is loosening. Similarly, slower economic growth suggests that domestic inflationary pressures are easing. And what is there not to love about falling headline inflation and stable underlying inflation?

Further, at the media conference Bullock said that these three economic measures are all inline with current RBA forecasts, albeit unemployment was a little higher than expected. So not only are the key measures moving in the right direction, they are behaving as expected. Central banks love an orderly path! Bullock also pointed out that a little monthly volatility is to be expected.

According to the RBA’s forecasts, unemployment will continue to increase, peaking at 4.7% in 2028. Headline inflation will peak at 4.8% in June, and economic growth will fall from the current 2.5% annual growth to 1.3% by the end of this year.

Keeping everyone alert

Ominously, the Monetary Policy Statement concluded with the statement that the “Board would do what is necessary and increase the cash rate if required”. In her media conference, Bullock also pointed out that the Board was not afraid to raise rates again if needed.

“Today’s decision does not rule out further tightening in monetary policy, if that is what is required to bring inflation down.”

No one doubts the stamina of the Board, but perhaps these statements are to ensure that consumers and businesses keep their feet on the brake rather than switch again to the accelerator. The Board does not want the pause in rates to be seen as easing. The RBA also wants to bring inflation expectations down. Talk is not cheap, especially when it comes from the mouth of a central bank governor!

Not ruling out rate rises is also a hedge against a restart (or continuation) of hostilities in the Middle East. An agreement will soon be signed in Geneva, but the control of Hormuz and Iran’s nuclear ambitions remain outstanding, while it remains to be seen if Israel and Hezbollah can stay in line.   

Australian Private Debt Market

The RBA paused rates this month but feels poised to deal with whatever happens next. Bullock and the Board are feeling good about where monetary policy is at. The economy remains resilient, but growth is slowing and the labour market is loosening as the RBA requires. Investors in Australian private debt can continue to ride the wave of Australia’s world-class macroeconomic management while enjoying high interest rates.