'Need a lot to go our way': RBA's warning after holding rates

The Reserve Bank of Australia to hand down its decision on interest rates

The Reserve Bank has kept interest rates on hold but has left the door open for another hike in the coming months as thousands of households anxiously rate for a long-heralded cut.

Speaking after the RBA decided to keep the cash rate target on hold at 4.35 per cent, Governor Michele Bullock said the option of an increase was discussed at this week's meeting, while the prospect of cutting them from the current 13-year high had not been put on the table.

"We still think we're on the narrow path but it does appear to be getting a bit narrower," she said.

"We need a lot to go our way if we're going to bring inflation back down to the 2-3 per cent target range. The board does need to be confident that inflation is moving sustainably towards target, and it will do what is necessary to achieve that outcome."

A raft of important economic data had been released since the RBA's last rates decision in May.

Parts of it – like higher-than-expected inflation and a drop in unemployment – arguably added to the case for a 14th rates increase, while others pointed to significant weakness in the economy.

Bullock said the RBA wasn't ruling anything in or out, and that the economic picture was proving difficult to read.

"I really, genuinely feel that we're in quite a complex situation here," she said.

"I know that there are people out there who are much more definite and who seem much more convinced that they know exactly what to do. It's not as easy as that.

"It's a challenging time and the reason it's a challenging time is because we're balancing risks on both sides here.

"Earlier on when we were raising rates it was quite obvious what we had to do. It's not so obvious now."

The current interest rate has been unchanged since November 2023. The financial market is still expecting the RBA's next move to be a cut rather than an increase.

Michele Bullock said the RBA discussed the case for a rate hike today, but not for a cut.

In its monetary statement the RBA board said it was deeply aware of the current financial conditions affecting Australian households - but more data was needed before moving on rates.

"There is uncertainty around consumption growth. Real disposable incomes have now stabilised and are expected to grow later in the year, assisted by lower inflation and tax cuts," Bullock and the board wrote.

"There has also been an increase in wealth, driven by housing prices. Together, these factors are expected to support growth in consumption over the coming year.

"But there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market."

Despite this, the board refused to be drawn on when rates would be cut - or if they would be cut at all.

"While recent data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation," the monetary statement reads.

"The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out."

Graham Cooke, head of consumer research at Finder, said the decision might feel like a punch in the gut for homeowners holding out for a rate cut.

"With inflation showing little signs of rapid decline, hopes of a rate cut to ease the pressure on household budgets seem further away," he said.

"Rising costs are relentless, eating away at savings and squeezing wallets, causing genuine financial pain for many."

Anneke Thompson, chief economist at CreditorWatch, said she anticipates the next move for the RBA is a rate cut - but that might not come until next year.

"Given the stress facing Australian households, both mortgaged and renters, as well as many small and medium-sized businesses, we feel it is unlikely the RBA will move the cash rate higher from here," Thompson said.

"Rather, the likely scenario is for the RBA to maintain the pressure on prices by keeping the cash rate at 4.35 per cent into early 2025, and only reducing it once the impact of lower migration levels begin to impact services inflation."

Steve Mickenbecker, Canstar's group executive of financial services, said stickier than expected inflation is pushing out the forecast timelines at most major lenders.

"In bad news for borrowers ANZ Bank has pushed out its projection for a first cash rate cut to February 2025 in reaction to slower than expected progress of inflation towards the 2 to 3 per cent RBA target band," he said.

"The other big banks are sticking to November 2024 for now.

"The slower trajectory towards the Reserve Bank inflation target band is reflecting in higher term deposit interest rates, with nine banks increasing 21 rates by an average of 0.41 per cent.

"There's not much in the way of good news for borrowers, as the two lenders cutting interest rates last week were countered by three bumping them up."