There's no relief on the horizon for households and borrowers hoping for an early rate cut, with the Reserve Bank holding the cash rate steady at its May meeting as the latest data shows inflation has been trickier to rein in than expected.

The cash rate will remain on hold at its 12-year high of 4.35%, where it has been since November last year, the RBA board decided on Tuesday.

In a statement following the meeting, the board said inflation was moderating, but progress had slowed.

"Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected and it remains high," the board said.

The RBA has kept the cash rate on hold at 4.35% at its May meeting. Picture: Getty

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Speaking to the media following the decision, RBA governor Michele Bullock said the rise in interest rates required to bring down inflation had been “painful”.

“We must continue to be vigilant about the continued risk of high inflation,” she said.

“We have made progress here and we’re not going to jeopardise that.”

The decision to keep rates steady came after data released last month by the Australian Bureau of Statistics (ABS) showed the final battle to bring inflation back to target was proving harder than anticipated.

The rate of inflation eased to 3.6% in the year to March 2024, down from 4.1% in December 2023 – a result that was higher than expected and dampened hopes of a rate cut later this year.

The RBA board said persistence of services inflation was a key uncertainty.

"It is expected to ease more slowly than previously forecast, reflecting stronger labour market conditions including a more gradual increase in the unemployment rate and the broader underutilisation rate."

While the inflation result was above expectations, it wasn’t alarming enough for the RBA to justify increasing interest rates further this month.

But the central bank once again emphasised that it would rely upon the data, and "is not ruling anything in or out" when it comes to getting inflation to target in a reasonable timeframe.

Ms Bullock said the board did discuss the option of raising rates, but felt that monetary policy was restrictive and leaving rates on hold was appropriate.

"We don’t think we necessarily have to tighten again, but we can’t rule it out," she said.

“I hope that we don’t have to raise interest rates again, [but] if we have to, we will."

The RBA decided to keep Interest rates on hold at its May board meeting, Michele Bullock's sixth as governor. Picture: Martin Ollman

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Economists widely expected the RBA to hold rates steady, and financial markets are no longer pricing in a rate cut until at least the second half of next year.

PropTrack economist Eleanor Creagh said the sustained pause in interest rates reflected further easing in inflation still to come as the full impact of high rates worked through the economy.

“Although inflation has not fallen as quickly as expected early in the year, retail sales and consumption are weak, and consumer sentiment remains low,” she said.

RBA unveils latest inflation forecasts

The RBA’s third meeting of the year under its revised schedule for longer, less frequent meetings coincided with the release of its updated economic forecasts in its Statement on Monetary Policy.

According to the RBA’s latest forecasts, CPI inflation will remain higher than previously expected in the near term, but will still enter the target range by the end of next year and hit the midpoint in mid-2026.

The RBA now expects inflation to sit at 3.8% until the end of this year, before falling sharply to 3.2% by June 2025.

The bank previously expected inflation to slow to 3.3% by June this year and 3.1% by June 2025.

In the Statement on Monetary Policy, the RBA said bringing inflation down to target within a reasonable timeframe was the board’s highest priority, but the path of inflation was "unlikely to be smooth".

"Higher petrol prices, the legislated end of energy rebates and stronger recent data will lift headline inflation in the near term," the report said.

"The timing of the anticipated return to target remains the same as previously forecast, as weaker activity is expected to dampen inflationary pressure in the second half of the forecast period."

"Keeping the cash rate at the current level supports continued progress of inflation to the target and moderate growth in employment."

Rate cuts pushed out

Underpinning the RBA's forecast is an assumption that the cash rate won't be cut until next year, based on expectations derived from financial market pricing.

"The cash rate is assumed to remain around its current level until mid-2025, around nine months longer than assumed in February," the RBA said in the Statement on Monetary Policy.

Sticky inflation will likely mean interest rates remain higher for longer, according to economists at major lenders Westpac and Commonwealth bank, who pushed back their predictions for the first rate cuts from September to November this year to match the other big banks.

Westpac chief economist Luci Ellis said the RBA would want to see more progress on inflation before even thinking about cutting rates.

Borrowers will need to endure high interest rates for longer, according to the big banks. Picture: Getty

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“With the inflation surprise in the March quarter and some further upside possible in the June quarter, the outlook for rate cuts in Australia has been pushed out,” she said.

Although inflation came in higher than expected in the March quarter, it has been trending down since December 2022, said Mortgage Choice chief executive Anthony Waldron.

“While the latest inflation data may have dashed borrowers’ hopes of a cash rate cut in the near future, I suspect the RBA will wait to see the federal budget and June quarter CPI before considering any changes to the cash rate,” he said.

Property prices keep rising

Property prices have continued to grow despite high interest rates, with Australia’s median home value reaching a new record in April after rising 6.6% over the past year.

Values have grown at double that rate in some cities including Perth (up 20.2%) Adelaide (up 14%) and Brisbane (up 12.8%)

Prices in Perth have gone up faster than in any other capital, rising more than 20% in the past year. Picture: Getty

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Meanwhile, the most recent ABS data shows the total value of new loan commitments in March was almost 18% higher than a year ago, with investor lending alone jumping about 31%.

Ms Creagh said interest rate stability had contributed towards property price growth.

“Although higher than expected inflation in the March quarter has pushed back the expected timing of rate cuts, most still expect that the next move for interest rates will be down. However, the timing remains uncertain.”

The imbalance between supply and demand has offset the higher interest rate environment and deterioration in affordability, Ms Creagh said.

“Property prices are expected to lift further this year, with housing demand buoyed by population growth, tight rental markets, resilient labour market conditions and home equity gains supporting upgrade activity.”