RBA Expected to Hold Cash Rate as Australian Inflation Moderates to 3.8 Percent
Australian economists forecast the Reserve Bank will maintain the cash rate at 4.35% despite headline inflation falling to 3.8% in June. Market data shows underlying inflation remains steady at 3.6%, keeping pressure on the central bank's target band.
Key takeaways
- A consensus of 37 economists expects the RBA to maintain the cash rate at 4.35% on Tuesday.
- Headline inflation has dropped to 3.8%, though trimmed mean inflation remains at 3.6%.
- Market analysts cite rising fuel prices and Middle East volatility as ongoing inflation risks.
What Happened
The Reserve Bank of Australia (RBA) board is scheduled to meet this Tuesday to determine the direction of national interest rates. A consensus of 37 leading economists predicts the central bank will keep the cash rate unchanged at 4.35%. This forecast follows the release of June data showing headline inflation decreased from 4% to 3.8%, marking its lowest level since the onset of the Iran war.
Market performance reflected cautious sentiment on Friday, with the ASX 200 closing down 0.1% at 9,263 points. While sectors such as Materials and Energy saw gains of 0.9% and 0.8% respectively, Industrials and Healthcare led the decline, falling by 1.6% and 1.4%.
Why It Matters
The RBA's preferred measure, trimmed mean inflation, remained steady at 3.6%. While headline figures have decreased, inflation remains above the bank's formal target range of 2% to 3%. Economists note that while unemployment is slightly higher than RBA forecasts, underlying inflation risks persist. Potential volatility in oil prices following the expiration of the federal fuel excise discount and ongoing Middle East instability remain significant variables for future policy decisions.
Background
Trimmed mean inflation has remained above the midpoint of the RBA's target band for over four years. Current market dynamics show a divergence in expert opinion regarding the timeline for future adjustments. While most analysts expect the next move to be a rate cut, some economists suggest a rate hike of 0.25 percentage points could occur to address persistent housing market pressures and decouple monetary policy from seasonal selling trends.
Key Facts
- Headline inflation fell to 3.8% in June, down from a previous 4.0%.
- The RBA's preferred inflation measure, trimmed mean inflation, is currently 3.6%.
- The Australian cash rate currently stands at 4.35%.
- The ASX 200 ended the recent session down 8 points, with 103 stocks gaining and 93 declining.
- The Australian dollar remained flat at approximately 70.30 US cents.
- Restocker lamb prices in New South Wales dropped by $1 per kilo due to persistent dry conditions.
What Happens Next
Governor Michele Bullock will face a parliamentary inquiry on Friday to address the board's recent decisions. Additionally, the National Australia Bank (NAB) is expected to release fresh business confidence figures this Tuesday, providing further insight into the domestic economic environment. Some analysts project the RBA may not begin cutting rates until the second half of 2027 if inflation does not return to target levels as currently projected.
Sources reviewed
Project Chintan independently synthesized and analyzed information cross-checked across the sources listed above.
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