Commonwealth Bank of Australia, the country's largest lender, expects the Reserve Bank of Australia to keep its key interest rate at 4.35% when it meets in August and then hold it steady through 2026. The forecast, outlined in a note from CBA economist Belinda Allen on Thursday, points to cooling inflation and a softening job market as reasons the central bank can afford to stay on hold.
Allen said recent data show there is “little need to tighten further,” suggesting the RBA's current stance is sufficient to bring inflation back toward its target range without additional rate increases. The cash rate has been at 4.35% since November 2023, when the RBA raised it by 25 basis points.
Why the RBA might hold steady
The RBA's key interest rate, known as the cash rate, is the rate at which banks lend to each other overnight. It influences borrowing costs across the economy, from home loans to business credit. When the central bank raises the cash rate, it makes borrowing more expensive, which tends to slow spending and cool inflation. When it holds rates steady, it signals that policymakers believe the current level is appropriate for the economic conditions.
CBA's view is that inflation in Australia is gradually easing. Consumer price growth has been moderating from its peak of around 7.8% in late 2022, and recent data suggest the trend is continuing. At the same time, the job market is showing signs of loosening. The unemployment rate has ticked up from historic lows, and job vacancies have declined, indicating that the tight labor conditions that pushed wages higher are easing.
This combination—slower price rises and a less overheated jobs market—gives the RBA room to keep rates unchanged. If inflation continues to fall and the economy slows, the central bank may even consider cutting rates later, but CBA's forecast suggests no change for the next two years.
What this means for investors
For everyday investors, a steady cash rate has several implications. First, it means borrowing costs for mortgages and business loans are likely to remain at their current elevated levels. Homeowners with variable-rate loans will not see relief from higher repayments, but they also won't face further increases. Fixed-rate borrowers who are rolling off lower rates will still face a jump to current market rates.
Second, a stable rate environment can be positive for certain sectors. Banks, for example, tend to benefit from a steady interest rate backdrop because it allows them to manage their net interest margins—the difference between what they earn on loans and what they pay on deposits—more predictably. CBA's own stock, as a major bank, could see support from this outlook.
Third, the RBA's hold stance may influence bond yields. When the central bank signals no rate changes, longer-term bond yields often move in response to inflation expectations and global factors. Investors in fixed-income securities should watch for shifts in the yield curve, which can affect the value of their holdings.
For those with exposure to Australian equities, the broader market may take cues from the RBA's patience. Sectors like real estate and consumer discretionary, which are sensitive to interest rates, could see less volatility if rates stay put. However, if the economy weakens more than expected, the RBA might eventually cut rates, which would boost those sectors but signal underlying economic trouble.
Broader economic context
Australia's economy has been navigating a period of high inflation and rising rates, similar to many other developed nations. The RBA's tightening cycle, which began in May 2022, has been one of the most aggressive in decades, lifting the cash rate from a record low of 0.10% to 4.35%. The central bank's goal is to bring inflation back to its 2-3% target band without triggering a recession.
Recent data have been mixed. While inflation has moderated, it remains above the target, and the job market, though loosening, is still relatively strong. The RBA has emphasized that it will be guided by incoming data, and CBA's forecast aligns with the view that the economy is on a path to a soft landing—where inflation cools without a sharp downturn.
Other major central banks, such as the US Federal Reserve and the European Central Bank, have also held rates steady in recent months as they assess the impact of previous hikes. The Fed, for instance, has kept its benchmark rate at 5.25-5.5% since July 2023, though it has signaled potential cuts later this year. The RBA's situation is somewhat different because Australian inflation has been stickier, partly due to strong domestic demand and a tight labor market.
For investors, the key takeaway is that the RBA appears comfortable with the current rate level. CBA's forecast suggests that the central bank will not need to act again for the foreseeable future, barring a major economic shock. This provides a degree of certainty for financial planning and investment strategy, though it also means that the cost of borrowing will remain high for some time.
As always, investors should monitor upcoming inflation and employment data, as any surprises could shift the RBA's stance. The next RBA meeting is in August, and the decision will be closely watched for any change in language or outlook.
