The Reserve Bank’s decision to leave interest rates unchanged at 4.35 per cent was widely expected. The more interesting question is whether the biggest inflation risk that shaped the decision is already beginning to recede.
The Board’s statement on Tuesday devoted considerable attention to the impact of the Middle East conflict on inflation. Higher fuel prices, disrupted oil supplies and the risk of broader price pressures featured prominently in its reasoning. Yet only days after the meeting papers were finalised, the United States and Iran announced an agreement that is expected to reopen the Strait of Hormuz and restore oil flows through one of the world’s most important energy corridors.
If the agreement holds, the inflation outlook confronting the Reserve Bank in August may look materially different from the one it assessed in June.
The decision itself was unanimous. The Board left the cash rate at 4.35 per cent after delivering three rate increases earlier this year. It acknowledged that financial conditions have tightened, consumer spending is slowing and momentum in the housing market has weakened. At the same time, it remained concerned that inflation is still too high and warned that further rate increases remain possible if required.
This was not a dovish statement.
The Board explicitly noted that inflation picked up materially in the second half of 2025 and that recent data suggests some of that increase reflected capacity pressures within the economy. It also highlighted evidence that businesses facing higher costs are continuing to lift prices and that short-term inflation expectations remain elevated.
The message was straightforward: inflation remains the primary concern, but the Reserve Bank believes the tightening already delivered is beginning to work.
That is arguably the most important signal in the statement.
After lifting rates three times in rapid succession, the Board now says there are signs the economy is slowing as expected. Consumer spending is moderating. Housing market momentum has shifted. The unemployment rate rose more than expected in April. These are not conditions that normally encourage a central bank to keep tightening aggressively unless inflation is clearly deteriorating.
The Reserve Bank has left rates unchanged at 4.35 per cent, but the inflation threat that shaped its decision may already be fading. As oil prices fall following the US-Iran agreement and the reopening of the Strait of Hormuz, the August meeting could look very different. The bigger question is whether easing energy costs are enough to offset a slowing economy and a tightening global financial environment
Treasurer Jim Chalmers welcomed the decision, describing it as a reprieve for households and noting that Australia is facing the same global uncertainties affecting other advanced economies.
He pointed to inflation outcomes in the United States, Canada and Europe, as well as rising interest rates overseas, including Tuesday’s decision by the Bank of Japan to lift rates by 25 basis points to their highest level since 1995.
That development deserves more attention than it is likely to receive.
For most of the past three decades, Japan has been a source of exceptionally cheap capital for global markets. Investors borrowed in yen and invested elsewhere, helping support asset prices around the world. The Bank of Japan’s decision to continue lifting rates is another sign that the era of ultra-cheap global money is ending. Even after the Iran agreement, that broader shift remains intact.
This is where the Reserve Bank’s decision intersects with the arguments being made by analysts such as Michael Howell, who has warned that global liquidity conditions are tightening and that inflation pressures may prove more persistent than many central banks expect.
Howell argues that the inflation debate is increasingly being driven by structural forces rather than temporary shocks. His focus is on global liquidity, capital spending linked to artificial intelligence and the growing difficulty central banks face in returning inflation to the levels that prevailed before the pandemic.
The Reserve Bank is not making that argument directly, but parts of its statement point in a similar direction. The Board noted that energy prices remain elevated relative to pre-conflict levels, that inflation expectations are still higher than earlier in the year and that there are plausible scenarios where inflation proves more persistent than currently forecast.
Yet the geopolitical backdrop has shifted significantly.
Just days ago, the principal inflation risk confronting policymakers was a disruption to global oil supply. Brent crude had surged above US$100 a barrel during the conflict and at one stage approached US$126. The prospect of prolonged restrictions through the Strait of Hormuz threatened to push fuel costs even higher.
Now the market is moving in the opposite direction.
Brent crude has already fallen sharply following news of the agreement between Washington and Tehran. The geopolitical risk premium that drove much of the spike is beginning to unwind. If oil prices continue to ease through July, one of the major inflation concerns highlighted by the Reserve Bank may become less pressing by the time the Board meets again in August.
That does not mean rate cuts are imminent.
The Board made clear that inflation remains above target and that it wants more evidence before changing direction. The June and July inflation data will therefore take on outsized importance. A sustained decline in fuel costs would help. So too would further signs that consumer demand is moderating and that labour market pressures are easing.
Property markets will also be watched closely.
Australia’s largest property valuation firm, Herron Todd White, said the rate hold and easing geopolitical tensions should improve confidence in the short term
Australia’s largest property valuation firm, Herron Todd White, said the rate hold and easing geopolitical tensions should improve confidence in the short term. The firm noted that confidence has been undermined by higher interest rates, proposed negative gearing reforms and the uncertainty generated by the Middle East conflict. It also warned that housing shortages, elevated construction costs and affordability pressures remain unresolved.
That assessment broadly aligns with the Reserve Bank’s own view. Confidence may improve, but the structural challenges facing the housing market have not disappeared.
The next meeting on 11 August now looks considerably more interesting than Tuesday’s decision.
In June, the Board paused because inflation remained too high and the oil shock was still unfolding. By August, the oil shock may be fading, but the broader questions will remain. Is inflation genuinely heading lower? Has the economy slowed enough? And how much damage can households absorb before tighter monetary policy begins weighing too heavily on growth?
The Reserve Bank spent much of June worrying about an oil shock. By August, it may be worrying about something else entirely.
The Iran agreement has eased one source of inflation pressure, but global monetary conditions remain tight and major central banks are still moving cautiously. The Bank of Japan’s latest rate increase is a reminder that Australia is not operating in isolation. The question for the Reserve Bank is no longer simply whether inflation is too high. It is whether inflation can keep falling before higher interest rates do too much damage to an economy that is already losing momentum.
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