Australia v the world: Why our official interest rate stands out

Australia's cash rate remains higher than those of several comparable economies after the Reserve Bank of Australia (RBA) left it unchanged at 4.35 per cent on Tuesday.

The decision underscores a key difference between Australia and many of its peers: inflation has proved more persistent, prompting the central bank to take a more cautious approach to cutting rates.

In its statement of monetary policy, the board explained its widely-anticipated decision was affected by global uncertainty and high inflation in 2026.

"The board remains focused on ensuring that high inflation does not become embedded," it said in its board statement announcing the decision to leave the cash rate on hold.

"While the impact of the Middle East conflict on inflation has so far been less than expected, headline inflation is still too high."

It said trimmed mean inflation — which strips out volatile items — also remained elevated and was "little changed form the March quarter".

The latest inflation data showed signs of cooling but it is still running about the RBA's 2-3 per cent target band, and the ongoing global uncertainty is likely to give the central bank "reason to pause", according to AMP chief economist Shane Oliver.

Oliver described interest rates as a "blunt instrument" for central banks around the world to reduce households' spending on discretionary items and tackle inflation.

So how do Australia's interest rates compare globally?

How Australia compares globally

Oliver explained that, historically, levers reserve banks can pull have been the best way to tackle inflation.

Relying on governments alone to help doesn't work as well, he said, because governments can be incentivised to spend more to win votes, even when inflation is high.

Cash rate targets differ around the world but share the unifying goal of keeping inflation down and promoting a high-employment economy.

Australia's cash rate target of 4.35 per cent is higher than those of other countries, such as the United States at 3.5-3.75 per cent, the UK at 3.75 per cent, and Canada at 2.25 per cent.

Australia also has higher core inflation, a measure stripping out economic volatility, than these other economies.

Professor and economist Warwick McKibbin from the Australian National University said that trends such as oil supply shocks can impact inflation globally.

Domestic factors, such as economic structure and openness to trade, can also play a part.

Different countries also have different goals for inflation, he said.

"The US has an inflation target of 2 per cent, that's the Federal Reserve's goal," McKibbin said.

"And so, historically, inflation generally doesn't rise significantly above that, although it actually has since COVID-19."

Meanwhile, Australia's inflation target is between 2 and 3 per cent, which can also lead to marginally higher inflation.

"What drives actual inflation is both expectations of inflation as well as what's happening in the economy," McKibbin said.

"So you'd expect our inflation rate's probably going to have a higher number than the US because our expectations will be leveraged somewhere between two and three, and that matters as well."

Aside from its inflation target, the RBA's other mandate is to support full employment, meaning as many Australians as possible in work without creating excessive inflation.

While Australia has higher inflation and a higher cash rate target than some other countries, it also has a healthy unemployment rate of 4.4 per cent, lower than the UK, Canada and New Zealand.

What's ahead?

Oliver said that the Australian economy has become more inflation-prone than that of some other countries over the last two years.

"And that is a concern, and something that the Reserve Bank has to be aware of and a reason why they need to be more cautious," he said.

"The RBA will likely retain a tightening bias as it does whatever is necessary to bring inflation down to target."

Australia's 'big four' banks — the Commonwealth Bank, NAB, Westpac and ANZ — don't expect any further movement this year.

But they all anticipate a cut in 2027.

• ANZ expects a 0.25 percentage point cut in September and December, lowering the cash rate to 3.85 per cent by the end of 2027
• Commonwealth expects cuts in May and August, bringing the rate to 3.85 per cent by the third quarter
• NAB forecasts three cuts — in June, September and December — taking the cash rate to 3.60 per cent
• Westpac expects cuts in August and December, taking the rate to 3.85 per cent

But Oliver said the RBA wouldn’t hesitate to lift rates in 2026 if needed.

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