RBA holds cash rate at 4.35% as economy slows

The Reserve Bank of Australia has left the cash rate target unchanged at 4.35% following its August Monetary Policy Board meeting. The decision was unanimous.

The decision was widely expected after three increases in the cash rate target since the beginning of the year. The key message from the Board is that monetary policy is now considered “somewhat restrictive” and the economy appears to be slowing as expected, but inflation remains too high and the RBA is prepared to increase rates again if upside risks materialise.

This is broadly consistent with CreditorWatch’s view ahead of the meeting. While keeping rates unchanged gives the Board time to assess the effects of its previous tightening, the decision does not necessarily mark the end of the tightening cycle. Persistently elevated inflation, capacity pressures and limited expected labour-market easing mean the possibility of a further increase remains live.

Key points from the RBA rates decision

The RBA’s assessment

The RBA said inflation increased materially in the second half of 2025, with information received since the beginning of this year confirming that some of the increase reflected greater capacity pressures in the economy. Headline inflation remains too high, while trimmed mean inflation is still elevated and was little changed from the March quarter.

While the inflationary impact of the Middle East conflict has so far been less severe than expected, oil and related commodity prices remain above their pre-conflict levels. Some businesses experiencing cost pressures are already increasing prices, while others are considering doing so. Short-term inflation expectations have eased but remain higher than earlier in the year.

Financial conditions have tightened following the three increases in the cash rate target this year. Money-market interest rates and government bond yields have risen, and the Australian dollar has appreciated. Consumer spending growth is showing signs of slowing gradually, although growth in business debt and investment remains strong.

The housing market has also lost momentum, with prices falling in some capital cities and new housing loans declining noticeably. Labour-market conditions have eased by slightly more than the RBA expected in recent months, although leading indicators point to only limited further easing in the near term.

Why did the RBA leave interest rates unchanged?

The Board’s decision reflects a judgement that the previous rate rises are beginning to slow the economy, but that more time is needed to assess their full effect on demand and inflation.

The RBA said growth in aggregate demand needs to remain subdued to reduce capacity pressures and return inflation to target. With financial conditions now tighter and the economy appearing to slow as expected, the Board chose to leave the cash rate unchanged while it monitors how economic conditions evolve.

This supports the argument that the Board currently has scope to wait rather than tighten again immediately. Softer consumer spending, weaker housing activity and some easing in the labour market are all indications that monetary policy is working.

Why another rate increase remains possible

Despite leaving rates unchanged, the RBA has maintained a clear tightening bias. Inflation is still above target and is not expected to return to around the midpoint of the target range until late 2027. The RBA also warned that global oil supply could take time to recover, maintaining upward pressure on energy prices and potentially adding to domestic inflation. Historically weak productivity growth continues to constrain Australia’s potential growth, further complicating the inflation outlook.

The Board said it would continue to do what it considers necessary to return inflation sustainably to target, including increasing the cash rate again if upside risks materialise.

In CreditorWatch’s assessment, continuing wage pressures, sticky services inflation and only limited expected labour-market easing mean it is too early to conclude that the cash rate has definitively peaked. The unanimous decision indicates that the Board did not see a case for an immediate increase, but its communication leaves open the prospect of additional tightening if inflation fails to moderate as forecast.

How likely is an interest rate cut in 2026?

The RBA’s statement provides little support for expectations of a near-term rate cut.

Although consumer spending, housing activity and labour-market conditions have softened, inflation remains the Board’s central concern. The RBA’s view is that demand growth must remain subdued and that monetary policy may need to be tightened further if inflation risks intensify.

Weaker housing turnover and prices are therefore more likely to be viewed as part of the transmission of restrictive monetary policy than as a reason for the Board to begin reducing rates.

What is the interest rate outlook?

The August decision confirms that the RBA has moved into a monitoring phase, but not necessarily that the tightening cycle is over.

The Board will now assess whether its three rate increases this year, alongside weaker housing conditions and slowing consumer spending, are sufficient to return inflation sustainably to target. Its next decisions will be guided by incoming inflation, wages, employment, spending and business-pricing data.

CreditorWatch expects the RBA to retain its warning that further tightening may be required. The case for any additional policy restriction is unlikely to become clear until the Board has more evidence on whether inflation and domestic cost pressures are moderating sufficiently.

For Australian businesses, the practical message is that borrowing costs are likely to remain elevated and the risk of another rate increase has not disappeared. Businesses should continue to monitor cash flow, customer payment behaviour and changes in credit risk closely, particularly where customers are already carrying higher financing, wage and input costs. This early-warning framing is consistent with CreditorWatch’s positioning as an authority on emerging financial stress and actionable business-risk intelligence