The Reserve Bank will raise rates again if it feels necessary, governor Michele Bullock has warned, after Tuesday’s decision to hit pause after three consecutive hikes.

The central bank has left interest rates on hold for the first time in 2026 amid a deteriorating economy and lingering questions over the potential peace deal in the Middle East.

The central bank’s monetary policy board voted unanimously on Tuesday to leave the cash rate steady at 4.35 per cent on Tuesday.

In her post-meeting media briefing, Bullock noted that the three hikes delivered so far this year – which have added hundreds of dollars a month to mortgage payments – had been tough for households.

“[But] today’s decision does not rule out further tightening of monetary policy if that is what is required to bring inflation down,” she said.

“We already had an inflation problem before the Strait of Hormuz (closed due to the Middle East war), and that supercharged things.

“If (a peace deal) comes to pass and over the next few months we start to see oil prices coming down, and we start to see supply chains working properly again, that’ll help.”

Tuesday’s decision had been anticipated by the majority of economists and financial markets.

But the question now is whether it heralds the end of the bank’s hiking cycle or is merely a pause before a further upwards move.

The odds of a rate hike lengthened following softer-than-expected economic growth figures, a jump in the unemployment rate and better-than-forecast inflation figures since the previous rate meeting in May.

“You’ve got to expect a slowing economy and when we see it people shouldn’t be alarmed about it. That’s what has to happen to bring inflation down,” Bullock said.

“Unless we can get inflation down, then ultimately it’s going to lead to higher unemployment.”

The effect of this year’s rate hikes. Image: Canstar

She said the bank board had not mulled a further rise to the official cash rate. It considered the national position to be better than earlier in the year, despite inflation still well outside the RBA’s 2-3 per cent target band.

Earlier, federal Treasurer Jim Chalmers welcomed RBA pause, linking it to the government’s “responsible” May budget and this week’s peace deal between the US and Iran.

“We’re very pleased with developments in the Middle East, but we’re realistic about how long it will take for the global economy to normalise and what that means for us,” Chalmers said.

“The end of this war can’t come soon enough – Australians have already paid a really hefty price for this conflict on the other side of the world, and there are more costs and consequences to play out in the long tail after this conflict, as well.”

Added to the list of considerations for the RBA was a federal budget that compounded a housing market slowdown thanks to proposed curbs to property investor tax breaks.

Economists have revised down home price growth forecasts, with ANZ now expecting a nationwide housing downturn in 2026 and 2027.

Ahead of Tuesday’s meeting, financial markets had priced in about a one-in-two chance of one more rate rise in 2026.

While all four big banks predicted a hold prior to the meeting, Westpac is alone in forecasting more hikes this year.

Senior economist Pat Bustamante said cost pressures were still coming through the pipeline strongly.

A survey of businesses by Westpac and the Australian Chamber of Commerce and Industry showed firms faced a growing squeeze on both costs and demand in the March quarter.

“On the one hand, we’re seeing activity stall,” Bustamante said in Canberra.

“But at the same time we’re seeing cost pressures remain elevated and expectations of future cost pressures are also high amongst the manufacturing sector.”

It demonstrated the dilemma for the RBA, working against two opposing forces, he said.

“The only way to rectify this is to [reignite] productivity growth across the economy. And that’s what the government should focus on: supply side measures, boost productivity and support growth without necessarily leading to more inflation,” Bustamante said.

-with AAP