Rates on hold as RBA Board keeps a watch on inflation
The Board presses pause on another rate hike for the third consecutive month
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Interest rates will remain on hold for another month, the RBA Board announced today.
In a statement released by Dr Philip Lowe – his last as governor of the RBA – he said the current 4.1 percent interest rate is creating ‘a more sustainable balance’ between economic supply and demand.
“In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month,” Dr Lowe said. “This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
The news was widely expected among economists and the major banks following the announcement that the rate of inflation had fallen to 4.9 percent in July, down from 5.4 percent in June.
Dr Lowe said inflation had passed its peak but it was still too high.
“While goods price inflation has eased, the prices of many services are rising briskly,” he said. “Rent inflation is also elevated. The central forecast is for CPI inflation to continue to decline and to be back within the 2–3 percent target range in late 2025.”
CoreLogic research director Tim Lawless said rents would most likely continue to put pressure on inflation for some time yet.
“CPI rents, which are allocated the second largest weighting within the CPI ‘basket’, remain a major inflationary driver, with the monthly CPI indicator reporting a 7.6 percent rise in the cost of rents in the year to July, accelerating from 7.3 percent in June.
“The trend indicates no slowdown in growth for rents paid.”
Acknowledging the two speed economy, Dr Lowe said some Australians were feeling the financial pinch of elevated interest rates more than others.
“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income,” he said.
However, he did not rule out further rate increases.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks,” he said. “In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
Dr Lowe will step down as governor in two weeks’ time. He will be succeeded by Michele Bullock.
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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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