Interest rates are on hold, but borrowers face a wait for cuts

But in her first media conference, Reserve Bank of Australia governor Michele Bullock warned that price pressures remained elevated and it was too early to declare victory on inflation.

In the widely anticipated decision, the RBA board welcomed figures showing inflation slowed significantly late last year, with the annual rate dropping to 4.1 per cent.

"While recent data indicate that inflation is easing, it remains high," the RBA board said. "The board expects that it will be some time yet before inflation is sustainably in the target range."

The central bank noted that although to cost of services was easing, it "remains high".

"This is consistent with continuing excess demand in the economy and strong domestic cost pressures, both for labour and non-labour inputs," the board said, warning that "further increases in interest rates cannot be ruled out".

But the bank has updated its forecasts to predict a faster return of inflation to the 2 to 3 per cent target band than it had previously anticipated.

It projects headline inflation will slow to 3.2 per cent by the end of the year and drop to 2.8 per cent by the end of 2025. Unemployment is forecast to gradually rise to 4.4 per cent next year.

Importantly, these forecasts are based on the technical assumption that interest rates have peaked and will remain where they are until mid-year.

While the central bank reckons demand still exceeds the economy's productive capacity, it thinks current interest rates are high enough to continue to slow spending and bring inflation lower.

It forecasts growth to slow to 1.3 per cent this year, down from the 1.8 expansion it predicted in November.

But even with the sharper slowdown, Ms Bullock said the central bank was not "ruling in or out anything".

The governor cautioned that the interest rate assumption used by the bank to develop its forecasts was not a prediction.

"I emphasise the word assumption. It isn't a commitment. It isn't a forecast. It isn't even an expectation. It's something to work with," she said.

Ms Bullock said inflation remained a challenge and underlined the central bank's determination to drive it lower.

"We have made good progress, but the job's not done," she said.

Treasurer Jim Chalmers said the RBA's continued rate pause would come "as a welcome relief for Australians who are already under the pump".

"We're making welcome and encouraging progress in this fight against inflation ... but it's not mission accomplished," the Treasurer said.

The central bank's decision came as the Coalition announced it would vote for the government's revised tax cuts, meaning 13.6 million taxpayers will receive a boost to their after-tax income from July 1, though the benefit for most will not flow until tax returns are lodged at the end of next financial year.

Introducing the legislation to Parliament, Dr Chalmers said the change would provide bigger tax cuts to 84 per cent of all taxpayers.

Dr Chalmers said the tax package would provide additional living cost relief without adding to inflation - a view backed by Ms Bullock.

Economists have flagged that the tax cuts could deliver a marginal boost to spending among low and middle income households.

But Ms Bullock said, "I don't think it's a material issue".

"It's the same amount of money being handed to households' it's just distributed slightly differently," the governor said.

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The central bank's cautious tone on the inflation outlook has dampened hopes for an imminent rate cut, but markets and many economists still think interest rates will begin to come down in the second half of the year.

Ms Bullock also faces questioning from MPs when she appears before a parliamentary committee on Friday.

The Reserve Bank's decision came as Australian Bureau of Statistics figures showed that consumer spending continued to weaken late last year.

The data showed that retail turnover per person fell to just $3542 in the December quarter from a high of $3828 in mid-2022, highlighting the impact high inflation and multiple interest rate hikes have had in curbing household spending.