RBA Holds Rates at 4.35%, Warns Further Hike 'Quite Possible'

The Reserve Bank of Australia (RBA) left its cash rate unchanged at 4.35% for a second consecutive meeting on Tuesday, but signalled that further tightening remains on the table. Governor Michele Bullock struck a hawkish tone, stating that she personally believes it is "quite possible" rates may need to rise again.

The decision was widely expected after second-quarter inflation data came in below forecasts and the housing market showed signs of cooling. However, Bullock noted that unlike in June, a rate hike was actively discussed this time, driven by concerns over the re-escalation of the Middle East conflict and its potential impact on energy prices.

"We will go again if we need to," Bullock said, adding that the board is thinking hard about when it might be appropriate to raise rates. The RBA has already increased rates by 75 basis points this year, fully reversing the easing from 2025, as it struggles to contain stubborn inflation.

The central bank's updated forecasts project inflation returning to its 2-3% target band in the second half of next year. Consumer price inflation is expected to ease to 3.6% by year-end and 2.6% by the end of 2027. Bullock described this timeframe as "reasonable" given recent economic shocks.

Markets reacted to the hawkish comments, with swaps now implying around a 50% chance of a rate increase in November and an 80% likelihood by early next year. The Australian dollar remained flat at $0.7055, while three-year government bond yields rose slightly.

Economists warn that the battle against inflation is far from over. "Today's decision should not be interpreted as an all-clear on inflation," said Cherelle Murphy, EY Oceania chief economist, noting a "material risk" of further tightening later this year if inflation proves more persistent than expected.