Why the market thinks Michele Bullock is bluffing on rate hikes

On Tuesday Michele Bullock announced that the interest rate will remain at 4.35 per cent rate. (ABC News: Dan Irvine)

Reserve Bank governor Michele Bullock is fond of saying that hiking the interest rate is only tool the RBA has to get inflation down.

After the RBA board decided, for the first time this year, not to use its principal tool, the board and its spokesperson-in-chief chose to put this secondary tool to good use.

"The board is focused on its mandate to deliver price stability and full employment," the board members said.

"It will do what it considers necessary to achieve that outcome, including increasing the cash rate target further if required."

Michele Bullock said leaving the interest rate unchanged would give the RBA time to assess the effects of previous increases. (ABC News: Dan Irvine)

When she stepped up to the microphone, Bullock was at pains to jawbone those left with any doubt.

"Today's decision does not rule out further tightening in monetary policy if that is what is required to bring inflation down," she emphasised.

"In making its decisions, the board will be focused on the data and what that suggests about the outlook and risks."

Between now and its next meeting in August, the Reserve Bank will receive another set of monthly inflation numbers, as well as the key June quarter consumer price data, and two more sets of unemployment figures to determine whether the recent spike to 4.5 per cent was an aberration or the start of a trend of lay-offs.

"I want to be very clear that inflation remains too high," she told reporters.

"Leaving rates on hold today will allow the board to assess how these previous increases are flowing through the economy."

Michele Bullock's announcement was in line with what was widely predicted. (ABC News: Dan Irvine)

But, despite the tough talk, traders haven't really changed their bets on further rate hikes.

From about 30 per cent before the meeting, the odds of an August rate rise have been sitting in the high-20s since the press conference.

The Reserve Bank keeps the interest rate at 4.35pc as Australia's economy slows down.

The market has priced in basically a 50-50 call as to whether rates will rise any further at all.

The Commonwealth Bank's analysts have thought for several weeks that the RBA was done after its May rate hike and would likely be cutting rates next year.

It's since been joined by ANZ and NAB, which expect two and three rate cuts respectively in 2027.

Its economics team, led by former RBA assistant governor Luci Ellis, still has two more rate hikes baked into its fore