The Australian Reserve Bank has pressed the "pause button" on raising interest rates for the first time this year, while insisting that it retains the option of further tightening.

After three consecutive interest rate hikes began to put pressure on the economy, the Reserve Bank of Australia announced on Tuesday that it would keep the key interest rate unchanged, pressing the "pause button" for the first time this year. This move was in line with market expectations, but the central bank also sent a clear signal: if inflation pressures do not ease effectively, there may still be further tightening of monetary policy in the future. The nine-member board of the Reserve Bank of Australia unanimously decided to maintain the cash rate target at 4.35%. The statement pointed out that there have been three interest rate hikes since the beginning of the year, tightening the financial environment significantly and showing signs of economic slowdown. "The financial environment is now tighter than previously, with signs of economic slowdown," the board said in a statement, reiterating that necessary actions will be taken to achieve policy goals, "including further increases in the cash rate target if necessary." Reserve Bank of Australia Governor Michelle Bullock admitted in a post-meeting press briefing that the three rate hikes have put pressure on households - increasing monthly mortgage repayments by hundreds of dollars. However, she emphasized, "Today's decision does not rule out the possibility of further tightening of monetary policy in the future, provided it is necessary to restrain inflation." Recent weaker than expected economic data provided room for the Reserve Bank of Australia to stay put. Since the May meeting, Australia's unemployment rate unexpectedly rose to a four-and-a-half-year high, household spending decreased, and economic growth was slightly lower than expected. The real estate market has also cooled off, influenced by rising borrowing costs and adjustments to government tax policies. Although the inflation rate is still above the upper limit of the Reserve Bank of Australia's target range of 2%-3%, recent data shows that inflation momentum is not as strong as expected. Bullock stated, "You must expect the economy to slow, and when people see that, they shouldn't panic. To lower inflation, this is what needs to happen." She warned that unless inflation can be brought down, "it will eventually lead to higher unemployment rates." The market had a subdued reaction to the hawkish tone in the statement. Traders reduced the probability of another interest rate hike this year to less than 60%, and the Australian dollar fell by 0.4%. The three-year government bond yield gave back earlier gains, staying at 4.43%. Three out of the four major banks in Australia believe that the Reserve Bank of Australia will keep interest rates unchanged for the remainder of 2026. Sally Auld of the National Australia Bank abandoned her previous expectation of another rate hike in August, citing a significant slowdown in economic momentum and predicting three rate cuts by the Reserve Bank of Australia next year. Westpac was the only one among the four banks to predict further rate hikes this year. The decision of the Reserve Bank of Australia brings it closer to the trend of most central banks globally inclining toward "waiting rather than acting." It is widely expected that the Federal Reserve, the Bank of England, and the Swiss National Bank will all maintain interest rates this week. However, there are exceptions: some Asian central banks are still tightening policy to restrain inflation and support their domestic currencies, with the Bank of Japan announcing an interest rate hike on Tuesday, and the European Central Bank taking its first tightening action in nearly three years last week. Wee Khoon Chong, a strategist at BNY Mellon Bank in the Asia-Pacific region, stated, "With tightening financial conditions and persistent high inflation, the Reserve Bank of Australia has sent a signal to wait. It remains slightly hawkish, clearly keeping the possibility of further rate hikes when necessary." The Reserve Bank of Australia specifically mentioned that the global geopolitical environment, particularly the evolving situation in the Middle East conflict, is a key variable affecting the inflation outlook. The passage of the Strait of Hormuz and the details of the temporary agreement between the U.S. and Iran will directly impact energy prices, which will then transmit to domestic inflation in Australia. Bullock said, "We already had inflation problems before the Middle East war led to the closure of the Strait of Hormuz, and the war has worsened the situation. If a peace agreement is reached, and we see oil prices drop and supply chains return to normal in the coming months, that will help." Australian Treasurer Jim Chalmers welcomed the Reserve Bank of Australia's decision to pause interest rate hikes, linking it to the government's "responsible" May budget and the peace agreement reached between the U.S. and Iran this week. However, he also warned, "The sooner the Middle East war ends, the better - Australians have already paid a heavy price for this conflict on the other side of the world, and there will be more costs and consequences to digest after the conflict ends." Stephen Smith, a partner at Deloitte Access Economics, pointed out, "The Reserve Bank of Australia is facing a dilemma: inflation is still too high, and economic growth momentum is clearly slowing down. This makes it difficult to balance its dual objectives." However, he added, "Therefore, the possibility of further rate hikes later in 2026 remains high." The Reserve Bank of Australia pursues a dual policy objective, aiming to keep inflation at the midpoint of the target range of 2.5%, while also striving to maintain maximum sustainable employment levels. The board stated, "There is still considerable uncertainty about domestic economic activity and the inflation outlook." The bank expects that economic growth will significantly slow down by the mid-term forecast period in 2028, and core inflation may remain above the target level for the foreseeable future.