The Reserve Bank of Australia (RBA) held its cash rate steady at 4.35% for the second consecutive meeting on Tuesday, as widely anticipated. The central bank noted that the Australian economy is slowing as expected, but warned that it does not rule out the possibility of raising rates again if necessary to manage inflation.

RBA Governor Michele Bullock struck a hawkish tone during the post-meeting press conference, stating she personally believes it is "quite likely" the central bank will need to raise rates again. This keeps the risk of a fourth rate hike this year alive. Following the conclusion of its August monetary policy meeting, the RBA stated that aggregate demand needs to remain persistently weak in order to ease capacity constraints and supply-demand pressures. The central bank affirmed it will take all necessary actions to bring inflation back to its target range, and that it would further increase the cash rate target if upside risks to inflation materialize.

Second-quarter inflation data came in below expectations, and the cooling in the housing market has been more pronounced than policymakers had previously anticipated. As a result, markets had broadly priced in the central bank's decision to hold rates steady. Governor Bullock indicated that, unlike the June meeting, the board discussed the option of raising rates at this meeting, largely due to the renewed escalation of the Middle East conflict. The board is carefully assessing the appropriate timing for any potential rate move. "If it becomes necessary, we will raise rates again," she said. "Personally, I think the possibility of a rate hike is not small, but we will continue to wait and see the direction of subsequent economic data."

To combat stubborn inflationary pressures fueled by surging energy prices, the RBA has already implemented a cumulative 75 basis points of rate hikes this year, fully reversing all the easing measures implemented in 2025. Governor Bullock had stated last month that Australia's economy might need to cool further to bring down inflation. The decision to hold rates was unanimous and largely in line with market expectations. The Australian dollar was flat at $0.7055, while the yield on the 3-year Australian government bond rose 2 basis points to 4.572%. In the wake of Bullock's hawkish comments, interest rate swap market pricing indicated that the probability of a rate hike in November rose to approximately 50%, while the probability of a hike before the start of next year reached 80%.