Inflation remains stubbornly above target, and the labour market is still tight, meaning this may not be the peak of the cycle
As widely expected, the Reserve Bank of Australia (RBA) held the cash rate steady at 4.35% in June, following three consecutive hikes at its previous three policy meetings. This hold will provide some relief for home buyers, particularly those at the earliest stages of repayment, who have seen an increase in their mortgage costs of around $350 per month since the RBA started its tightening cycle in February (based on the average owner-occupier mortgage of $735,000 in the December quarter 2025).
The key question here is whether this marks the end of the current cycle or is merely a brief pause, allowing more time for the central bank to assess the impact of the rate hikes implemented this year on key measures such as inflation and unemployment. This is important given that there is typically a long lag between changes in the cash rate and its full impact on the economy (which can be in the range of 12-18 months). The risk in any tightening cycle is going too far, too fast, resulting in an unnecessary hit to economic activity in an effort to control inflation.
The most recent inflation data showed only a limited pass-through from higher fuel prices (which drove headline inflation above 4% in both March and April) and the RBA’s preferred trimmed mean measure. Trimmed mean inflation edged up to 3.4% in April (from 3.3% in March), despite anecdotal evidence that April marked the start of fuel surcharges that could flow through the broader economy.
There remain elements of upside risk to inflation in the near term, including from the housing sector. New dwelling prices in the CPI basket rose by 4.7% yoy in April, with this annual growth rate trending higher since mid-2025, while CPI rents was up by 3.5%, although this measure has eased a little in the past few months. There is a noticeable lag between the CPI measure and what Cotality observes in market rents, with the latter accelerating substantially since mid-2025, pointing to additional inflationary pressure from this segment in the coming months.
The latest labour market data was a little weaker than expected, with total employment falling in April and the unemployment rate moving up to 4.5% (from 4.3% in March). The RBA has been seeking greater slack in the labour market to reduce inflationary pressures via wage growth. A single month’s data may not give a clear indication that this has been achieved, particularly given that the underemployment rate moved a touch lower in April, and there was extra seasonality in the data related to the timing of Easter. We may need a few extra months of data to know whether labour market conditions have truly eased.
The next move in interest rates will likely depend on the direction of inflation in the coming months. Expectations of further rate hikes have been decreasing. Following the RBA meeting in May, two additional hikes were almost fully priced in the interbank futures market. At the time of writing, a single further hike is now seen as just slightly higher than a 50-50 bet. Among the big 4 banks, only Westpac see the likelihood of further hikes, with the others seeing rates at their peak.
While the pause will be welcome news for home buyers, the prospect of a rate cut looks unlikely until well into 2027. This means that the negative impact on housing demand from restrictive rate settings is likely to continue in the near-term, with a high likelihood of a downturn in home values in the coming months.
