
The Reserve Bank of Australia lifted the cash rate to 4.35% in a decisive vote, while pairing the move with a sharp downgrade to the growth outlook and only modest upward revisions to inflation. With policy now near the top of the neutral range, we expect the RBA to keep rates on hold in June unless inflation data materially surprises to the upside.
RBA hikes cash rate in line with expectations
The RBA raised the cash rate by 25bp to 4.35%, in line with market expectations. The decision was more decisive than at the previous meeting, with eight out of nine Board members voting for a hike, compared with a split vote last time.
Balanced communication: weaker growth, only slight inflation upgrade
The RBA’s forecasts and messaging point to a more balanced outlook. Growth projections were downgraded materially, with GDP growth for 2026 cut by 0.5pp to 1.3% and the unemployment rate revised up by 0.1pp to 4.6% by end‑2027, underscoring rising concern about activity. By contrast, inflation forecasts were revised up only modestly: the trimmed mean CPI forecast was lifted by just 0.1pp to 3.8% for mid‑2026 and is still expected to peak around then, while CPI inflation is projected to fall slightly more by December 2027. The RBA’s communication also suggests the current cash rate sits within - but close to the upper bound of - the range of model‑based estimates of the nominal neutral rate.
Outlook
Looking ahead, the RBA is signalling that policy is now restrictive, but not necessarily on a one‑way tightening path. Inflation remains sticky, with headline CPI still expected to peak at 4.8% in mid‑2026 and only drift back to target by mid‑2028. However, the noticeable downgrade to growth and the rising unemployment track suggest the Bank is becoming more alert to downside risks. While the forecasts still bake in a higher peak cash rate of 4.7% by end‑2026, the tone of the communication points to a willingness to pause and assess. For now, that argues for the RBA staying on hold in June unless inflation data materially surprises to the upside.




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