The Reserve Bank has declared it’s in no rush to cut interest rates after surprising financial markets this month by keeping them on hold.
The minutes of that July 8 meeting, released on Tuesday, have revealed the RBA’s monetary policy board was worried about cutting rates again too soon, on the back of relief in February and May.
This led to six board members, out of nine, voting to leave the cash rate on hold at 3.85 per cent, with the RBA this month confirming unattributed votes for the first time.
‘They believed that lowering the cash rate a third time within the space of four meetings would be unlikely to be consistent with the strategy of easing monetary policy in a cautious and gradual manner to achieve the board’s inflation and full employment objectives,’ it said.
‘While the flow of recent data had been broadly in line with earlier forecasts, they judged that some data had been slightly stronger than expected.’
The RBA this month surprised economists at the Big Four banks and financial markets, which had regarded relief as a 97 per cent chance.
Instead, borrowers with an average $660,000 mortgage were denied a $106 a month cut to their monthly repayments.
The experts had expected a July cut after monthly headline inflation data for May showed the consumer price index falling to just 2.1 per cent, putting it on the low side of the Reserve Bank’s two to three per cent target.
The Reserve Bank has declared it’s in no rush to cut interest rates after surprising financial markets this month by keeping them on hold (pictured is a Commonwealth Bank branch in Sydney)
They had ruled out the RBA waiting until August 12 following the late July release of more comprehensive June quarter inflation data.
But the Reserve Bank minutes said the monetary policy board needed to be more confident that inflation would stay at the mid-point of its two to three per cent target and not creep higher again.
‘Several indicators had been in line with, or even slightly stronger than, staff projections, pointing to the benefit of waiting for a little more information to confirm that inflation remains on track to be at 2.5 per cent on a sustainable basis,’ it said.
The Reserve Bank’s July meeting minutes also expressed concern about headline inflation increasing again from late 2025, following the expiry of $75 quarterly electricity rebates in December.
‘Looking ahead, headline inflation was expected to pick up temporarily to around the top of the target range in late 2025 and remain there in 2026, reflecting the currently legislated unwinding of government energy subsidies to households,’ it said.
Financial markets are now less certain the Reserve Bank will cut rates next month, with the 30-day interbank futures market regarding relief as a 51 per cent chance.
But traders are still expecting the RBA cash rate to fall to 3.1 per cent by the end of this year, implying three more rate cuts in 2025.
‘All members agreed that, based on the information currently available, the outlook was for underlying inflation to decline further in year-ended terms, warranting some additional reduction in interest rates over time,’ the RBA minutes said.
The minutes of that July 8 meeting, released on Tuesday, have revealed the RBA’s monetary policy board was worried about cutting rates again too soon, on the back of relief in February and May (pictured is Reserve Bank Governor Michele Bullock)
‘The focus at this meeting was on the appropriate timing and extent of further easing, against the backdrop of heightened uncertainty.’
Commonwealth Bank senior economist Belinda Allen said an August rate cut was likely but only if underlying inflation in the June quarter declined from 2.9 per cent in the March quarter.
Core inflation, without big price drops, was higher than the quarterly headline inflation rate of 2.4 per cent, which factored in declines in electricity and petrol prices.
‘Our base case is for a 25 basis point rate cut in August as long as the annual trimmed mean CPI continues to moderate from its current rate of 2.9 per cent,’ she said.
‘But it is not a done deal. We expect another rate cut in November with the risk of an additional cut in early 2026.’
She added the RBA’s monetary policy board was cautious.
‘The decision was against the almost universal expectation of a cut by economists and financial markets,’ Ms Allen said.
Unemployment last month shot up to 4.3 per cent, marking the highest jobless rate since November 2021, when Sydney and Melbourne were emerging from Covid lockdowns.
Unemployment last month shot up to 4.3 per cent, marking the highest jobless rate since November 2021, when Sydney and Melbourne were emerging from Covid lockdowns (pictured is a Sydney barista)
This Australian Bureau of Statistics data was released nine days after the RBA board meeting.
‘The staff still assessed that labour market conditions were tight, though with a considerable degree of uncertainty,’ the minutes said.
The Reserve Bank noted Donald Trump’s tariffs were a threat to Australia’s already weak economic growth.
‘Uncertainty in the world economy remained pronounced and the material increase in US tariffs – even if not as extreme as had been announced in early April – would be a drag on future growth abroad, and thereby domestic economic activity and inflation,’ it said.
The RBA noted a minority of monetary policy board members were in favour of a July rate cut with Australia’s economic growth pace of 1.3 per cent remaining well-below the long-term average of three per cent during a time of weak productivity growth.
‘These members placed more weight on downside risks to the economic outlook – stemming from a likely slowing in growth abroad and from the subdued pace of GDP growth in Australia,’ the minutes said.
‘The staff’s forecast for output growth continued to assume that annual productivity growth would pick up, despite no rise in productivity since 2016.
‘Members noted that this assumption materially influences the medium-term outlook for growth in the economy’s supply capacity, incomes and demand.’
