The Reserve Bank of Australia (RBA) has raised the official cash rate for the third consecutive meeting, lifting it to 4.35% from 4.1%, in a move widely anticipated by markets. The decision aims to contain growing inflationary pressures linked to higher fuel prices, even as the central bank warned that the conflict involving Iran would deliver a major blow to the economy.
Economic Forecasts Worsen
The RBA revealed gloomy new forecasts showing intensifying cost-of-living pressures alongside weaker growth. The fallout from the US-Israel war on Iran is expected to slash half a percentage point off economic growth in 2026 compared to pre-conflict forecasts made in February. Annual growth is projected to halve to 1.3% this year.
The stagflationary effect of the oil supply shock will push inflation higher, with consumer price growth reaching 4.8% in the year to the June quarter, versus a prewar estimate of 4.2%. The RBA board warned that inflation is likely to stay high even if the Iran war ends soon, as many local businesses are experiencing cost pressures and looking to increase prices.
Board Decision and Impact on Households
Eight out of nine board members voted for the rate hike, with only one voting to leave rates on hold. The decision comes as a blow to the more than 3 million mortgaged households in Australia, just a week before the federal budget is set to be delivered.
Treasurer Jim Chalmers has described the upcoming budget as both his most ambitious and responsible yet, but the RBA's decision underscores the challenging economic environment. The central bank's outlook suggests Australians will suffer another year of falling living standards, as prices rise faster than pay packets.
Scenarios and Unemployment Projections
Under the RBA's relatively optimistic baseline scenario, which assumes a rapid end to the Middle East conflict, the hit to growth will not lead to substantially higher unemployment in the near term. The jobless rate is expected to remain at a relatively low 4.3% by the end of this year.
However, the RBA also explored two adverse scenarios involving a more extended conflict that keeps oil prices higher for longer. Under the more extreme version, unemployment could push above 5% as the economy slows more sharply. Even under this pessimistic scenario, Australia avoids a recession, although the RBA noted it did not model the possibility of fuel shortages.
The RBA's decision and forecasts highlight the delicate balance the central bank must strike between controlling inflation and supporting economic growth amid global uncertainties.
