An interest rate pause as RBA adopts ‘wait and see’ strategy
Economic conditions remain tight as the board refuses to rule out further increases before the year ends
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Interest rates have been left on hold following the meeting of the RBA Board today.
The cash rate will remain at 4.1 percent as the board acknowledged the need to balance drawing down inflation against the possibility of a looming recession.
Governor Philip Lowe said in a statement that returning inflation to a more manageable level within ‘a more reasonable time frame’ is still the board’s objective but that recent data points to a 2 to 3 percent target ‘over the forecast horizon’.
The Australian Bureau of Statistics last week released data that inflation had fallen for the second consecutive month to 6 percent, down from a high of 7.8 percent in December 2022.
Dr Lowe said it would most likely take a year or more to return inflation to the target range but that the board was determined to do so.
“Inflation in Australia is declining but is still too high at 6 percent,” he said. “Goods price inflation has eased, but the prices of many services are rising briskly. Rent inflation is also elevated.
“The central forecast is for CPI inflation to continue to decline, to be around 3¼ per cent by the end of 2024 and to be back within the 2–3 percent target range in late 2025.”
Dr Lowe also forewarned that further interest rates could not be ruled out.
CoreLogic research director Tim Lawless said while the news would be welcomed by mortgage holders, the economic pressures that could trigger further rises remain.
“Highlighting the uncertainty ahead, some economists have already called a peak in the rate hiking cycle, others believe there will be one more hike in the coming months, while others are pricing in two more rate hikes on the basis of tight labour market conditions potentially feeding wages growth and keeping inflation higher for longer,” he said. “The range of cash rate forecasts reflects the sheer uncertainty in the economy.”
PropTrack senior economist Eleanor Creagh, said the decision allowed the RBA Board to take a ‘wait and see’ approach.
“This (decision) gives the RBA more time to assess the impact of rate rises already delivered on households, businesses, and economic conditions.”
The RBA Board will meet again in September, which will be Dr Lowe’s last meeting as governor. Michele Bullock will step into the role when Dr Lowe vacates the position on September 17.
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Strong consumer spending and tight supply have driven retail to the top of commercial property, but signs of pressure are starting to emerge.
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Australia’s retail property sector entered 2026 as the strongest performing commercial asset class, but rising geopolitical risks and cost pressures are beginning to test its resilience, according to new research from Knight Frank.
The latest Australian Retail Review shows the sector rode a wave of consumer spending and constrained supply through 2025, delivering total returns of 9.2 per cent and driving transaction volumes up 43 per cent year-on-year to $14.4 billion.
That momentum carried into early 2026, with around $3.6 billion in deals recorded in the first quarter alone.
“Retail clearly emerged as the standout commercial property performer in 2025,” said Knight Frank Senior Economist, Research & Consulting Alistair Read.
“Improving household spending, limited new supply and stronger leasing fundamentals combined to drive better income growth and renewed investor confidence in the sector.”
Spending rebound drives retail strength
A lift in household spending has been central to the sector’s performance. Consumer spending rose 4.6 per cent year-on-year to February 2026, supported by easing inflation and improving real incomes.
That shift flowed directly into retailer performance, with average EBIT margins across major retailers rising to 8.9 per cent in the first half of 2026, their strongest level in several years.
“Stronger consumer spending was critical in restoring momentum to the retail sector,” Mr Read said.
“Retailers have generally been better able to absorb costs, rebuild margins and support sustainable rental outcomes, particularly in higher-quality centres.”
Improved trading conditions also pushed leasing spreads up 4.2 per cent in 2025, reinforcing income growth and supporting capital values.
Geopolitical tensions begin to bite
But the outlook has become more complicated. The report warns that escalating conflict in the Middle East and its impact on fuel prices, supply chains and interest rates could weigh heavily on consumer spending.
“Higher fuel prices, flow-on cost pressures across supply chains, and recent interest rate increases are collectively squeezing household budgets, and early consumer sentiment data suggests confidence is already softening,” Mr Read said.
“While household balance sheets remain generally resilient, heightened uncertainty over future costs is likely to weigh on spending — particularly in discretionary categories — in the months ahead.”
The impact is already being felt in investment activity. While the year began strongly, transaction volumes slowed in March as investors paused amid the uncertainty.
“Early indicators suggest elevated uncertainty has already begun to affect the market. While retail investment enjoyed its strongest start to a year in a decade, with nearly $3 billion transacted by the end of February, activity stalled in March, as investors took a pause amid elevated uncertainty,” Mr Read said.
Solid foundations support medium-term outlook
Despite the near-term headwinds, Knight Frank maintains that the sector’s underlying fundamentals remain strong. Limited new supply, high construction costs and population growth are expected to continue supporting rental growth over the medium term.
“Retail has entered this period of uncertainty from a position of strength,” Mr Read said.
“Supply-side constraints, population growth and improving income fundamentals remain powerful structural supports for the sector.”
The report highlights several trends shaping the year ahead, including steady yields as interest rates rise, mounting pressure on tenant margins, continued outperformance of prime centres, the growing need for logistics integration, and risks linked to underinvestment in capital expenditure.
For now, retail remains a sector with momentum, but one increasingly at the mercy of forces far beyond the shopping centre.
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