The Reserve Bank of Australia has held the official cash rate at 4.35% but threatened to hike again if needed, as it warned falling house prices would slow income growth.

The widely expected decision comes after a steep decline in property values in Sydney and Melbourne arrived in Brisbane, Perth and Adelaide following three rate hikes earlier this year.

Economists and financial markets were unanimous in predicting no change following the latest two-day RBA board meeting.

In a statement accompanying the decision, the RBA board said that after this year’s three rate hikes “the economy appears to be slowing as expected”, but warned that it “will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if upside risks materialise”.

Board members all voted in favour of holding the cash rate, even as they acknowledged that “inflation is still too high”.

At 3.8% in the year to June, headline inflation would not return towards the targeted 2.5% until late 2027 and “there are upside risks to this projection”, the board said.

“With monetary policy judged to be somewhat restrictive, the board decided to leave the cash rate target unchanged while it assesses how the economy is evolving,” the statement said.

But Stephen Smith, a partner at Deloitte Access Economics, said the statement suggested the RBA “increasingly feels its job may be done”.

“However, another rate rise in 2026 cannot be fully ruled out,” he said.

The RBA warned it was ready to hike again but markets seemed to tip against another rate rise in the aftermath of the decision. The Australian sharemarket rose, while the Australian dollar and bond yields fell, suggesting traders expected lower interest rates in future.

The treasurer, Jim Chalmers, said Tuesday’s decision to hold was “welcome” amid uncertainty in the global economy.

“This will come as a relief to Australians with a mortgage,” Chalmers said.

The RBA released its latest assessment of the economy’s health in new forecasts on Tuesday.

Economic growth would hold at about 1.4% over 2026, with slightly higher population growth offset by a surprisingly heavy drop in home prices, it predicted in its statement on monetary policy.

The RBA predicted household spending would be weaker than expected in 2026, as falling house prices would reduce household wealth and lead to fewer home sales.

ANZ economists on Tuesday released separate forecasts predicting capital cities’ home prices would fall at least 5% from their respective peaks early this year, with Sydney to fall 14.5% and Melbourne 12.8%.

The RBA cited research suggesting the federal budget’s tax reforms alone would leave house prices up to 5% lower in the long term. It noted prices had risen about 5% in the last year and were up 50% since 2020.

New home loans have already begun to slow. Investor loan commitments in June had fallen by roughly a quarter compared with the start of the year, as a share of total housing credit, the RBA reported.

Westpac on Monday reported a 20% fall in home loan applications since mid-May, blaming interest rate rises rather than the federal budget.

As the housing market slows, some banks have started cutting advertised mortgage rates by as much as the equivalent of an interest rate hike. The RBA said this demonstrated “continued strong competition and could reflect efforts to maintain market share”.

Mortgage holders have kept ahead on repayments as rates rise, with seven in eight borrowers holding almost a year or more worth of repayments in their offset and redraw accounts.

The RBA predicted a recovery in house prices, along with falling interest rates, could push per person economic activity back up again by 2028.

Australia’s economic growth is expected to be supported by a boom in datacentre investment. The RBA has previously warned the rapid build-out could add to inflation but its Tuesday statement said businesses were reporting no issues getting workers and materials for datacentre projects.

Underlying price pressures had risen in construction material costs and groceries, including fruit and vegetables. Service industries such as hospitality had also continued to report rising costs, with a tight jobs market adding to pressure on business.

Bullock will hold her regular press conference at 3.30pm AEST in Sydney.