The Reserve Bank has hit the brakes on interest rates, opting for a pause in an announcement that had been widely predicted.

Tuesday afternoon’s decision came after the central bank lifted the official cash rate by 25 basis points to 4.35 per cent at its most recent meeting in May.

That rise – the third in a row – wiped out more than a year of cuts, and took interest rates to where they last were nearly 18 months ago.

In its post-meeting statement, the board noted its decision was unanimous.

“Following the three increases in the cash rate target since the beginning of the year, financial conditions are now tighter than they were, and there are signs that the economy is slowing as expected,” it said.

“But inflation is still too high and the board judged that it was appropriate to leave the cash rate target unchanged while it assesses the response to previous interest rate rises and the impact of the oil supply disruption.”

Since the bank’s May meeting, sluggish GDP data for the March quarter and rising unemployment had suggested Australia was already in a downswing. But – with inflation still running well beyond its 2-3 per cent target band – borrowers should not expect the RBA to deliver cuts any time soon, HSBC chief economist Paul Bloxham said.

He predicted an end to rate rises in this cycle, but said relief for borrowers was unlikely until at least 2027.

The RBA board should take a lesson from 2025, when it cut interest rates three times as inflation was still coming down, and not turn its back on the inflation dragon until it was sufficiently tamed, Bloxham said.

“We expect the board to judge that now is the time to pause, but that the fight may not be over yet,” he wrote in a research note.

“The knight will need to remain armed and vigilant. No returning with good news of a slayed dragon and cutting the cash rate quite yet.”

Financial markets had agreed with the vast majority of economists that the Reserve Bank would hold the cash rate steady on Tuesday. However, they have priced in about a one-in-two chance of one more rate rise in 2026.

IG market analyst Tony Sycamore said underlying inflation had been less worrying than feared, growth had been subdued and the federal budget had further weighed on sentiment since the board’s last meeting.

With a hold confirmed on Tuesday, attention would turn to the tone of the board’s accompanying statement and governor Michele Bullock’s press conference for any hints around the likelihood of further tightening, he said.

Even with a hold, borrowers with a $1 million mortgage are paying about $450 more a month in interest payments than in February, before the Reserve Bank’s hiking cycle began.

CreditorWatch chief economist Ivan Colhoun said businesses were also feeling the pressure, with late payments at a six-year high.

Ahead of the RBA announcement, Finance Brokers Association of Australia spokesperson Peter White urged borrowers not to be complacent.

“After multiple rate rises, it’s the perfect time for mortgage holders to pause and review their current situation,” he said.

“Many Australians are unknowing victims of ‘rate creep’, where lenders raise rates for existing customers while offering discounted rates to new borrowers. This means you could be paying more in repayments than you should be.”

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

White said many borrowers didn’t realise they could approach their lender and ask for a rate reduction.

“If the lender won’t do this – and many will not as they assume you won’t leave – ask a mortgage broker to look at the market and assess your situation and the options available,” he said.

He said better deals were often available elsewhere.

“As cost of living pressures mount, there may be savings available for borrowers who are proactive,” he said.

-with AAP