RBA Raises Rates to 4.35%, Nomura Expects a Pause

Overview

This report analyzes the RBA's latest monetary policy decision. The RBA raised the cash rate target by 25bps to 4.35% for the third consecutive time, in line with market expectations. Nomura views the hike as hawkish, but the post-meeting statement and governor's press conference conveyed a balanced tone, not exceeding market expectations. Combined with the significant downward revision to growth forecasts, Nomura maintains its core view that the RBA will shift to a 'wait-and-see' mode after completing this hike cycle, with no further hikes in the near term.

Core views

Policy Decision and Communication Tone: The RBA board voted 8-1 in favor of the hike, with only one member advocating for no change. The policy statement balanced hawkish and dovish signals. On the hawkish side, the statement noted early signs of businesses passing on costs and potential second-round effects in goods and services prices, which could raise future inflation if embedded in long-term expectations. However, dovish signals were equally evident, with the statement more firmly stating 'financial conditions have tightened this year' (compared to 'slightly tightened' in March) and emphasizing this as the third consecutive hike. Nomura interprets this shift as the RBA acknowledging substantial policy tightening and possibly preparing to pause. Significant Downward Revision to Growth Forecasts: The RBA updated its economic and inflation forecasts, with an overall dovish tilt. GDP growth forecasts were sharply lowered, with year-end 2026 growth at 1.3% (prev. 1.8%) and 2027 at 1.4% (prev. 1.6%). This is notably below the RBA's estimated potential GDP growth of around 2%, implying below-potential growth. Correspondingly, the long-term unemployment forecast was revised up by 0.1ppt to 4.6% by end-2027 and 4.7% by mid-2028, likely above most estimates of full employment. Inflation Path and Rate Outlook: Headline CPI inflation forecasts were raised, peaking at 4.8% in mid-2026 (up 0.6ppt), slightly below current market consensus. Core inflation (Trimmed Mean CPI) was adjusted marginally to 3.8%. While the RBA expressed concerns about inflation pass-through, the forecasts suggest limited evidence. Core inflation is expected to stay elevated longer, with mid-2027 at 3.1%, but the end-point forecast of 2.5% suggests the RBA expects to meet its target within the forecast horizon. Notably, these forecasts assume declining oil prices and current market pricing (implied OCR at 4.6-4.7%), which could be interpreted as leaving room for further hikes, though Nomura disagrees.

Analysis framework

Nomura's analysis focuses on nuances in central bank communication and cross-validation with macro data. First, by comparing changes in wording on 'financial conditions' (from 'slightly tightened' to 'have tightened'), it infers the RBA's heightened awareness of policy restrictiveness, supporting a 'pause' view. Second, analyzing revised growth forecasts—lowered below potential with higher unemployment—provides a fundamental basis for cautious policy to avoid overtightening. Lastly, market reactions (AUD and yields slightly lower) confirm the communication was not 'overly hawkish,' supporting existing rate and FX strategies.

Methodology notes

• Macro Framework

  Central Bank Communication Analysis and Forward Guidance Interpretation

  Deconstructing changes in central bank language (e.g., strength of adjectives, emphasis in descriptions) and voting patterns to gauge marginal shifts in policy direction, beyond just rate levels.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Output Gap and Potential GDP Analysis

  Comparing actual GDP forecasts with potential GDP estimates to assess overheating or slack. Below-potential growth typically signals weak demand, justifying a pause or easing.

Key data

• Cash Rate Target4.35%Third consecutive 25bps hike, in line with expectations
• Board Vote Outcome8:18 members voted for hike, 1 for no change
• 2026 Year-End GDP Growth Forecast1.3%Sharply lowered from 1.8%, below potential
• 2027 Year-End GDP Growth Forecast1.4%Lowered from 1.6%
• Headline CPI Inflation Peak Forecast4.8%Expected mid-2026, up 0.6ppt from prior
• Trimmed Mean CPI Inflation Peak Forecast3.8%Expected mid-2026, up 0.1ppt
• Long-Term Unemployment Forecast4.6%-4.7%End-2027 to mid-2028, up 0.1ppt

Impact & implications

For markets and policy, Nomura sees the RBA's move as signaling a nearing end to the tightening cycle. While the statement retains the possibility of responding to second-round effects, the sharp growth downgrade gives the RBA 'space' to monitor prior hikes. For investors, this means further hike risks exist (Nomura acknowledges a bias toward hikes), but probabilities are fading. Market reactions (AUD and yields slightly lower) align with this. Nomura thus maintains its strategies without new positions, awaiting next week’s budget for potential fiscal tightening signals to further confirm its view.

Risks

• Second-round inflation effects may be stronger than expected, forcing further hikes.
• Long-term inflation expectations may de-anchor, prompting more aggressive tightening.
• Market pricing implies OCR at 4.6-4.7%; a hawkish shift could trigger volatility.

What to watch

• Next week’s federal budget for potential fiscal tightening measures.
• Data on business and consumer responses to recent financial tightening.
• Subsequent inflation data to confirm second-round effects.