In a decision split 6 in favour, 3 against, the RBA Board decided to wait before cutting rates. It wasn’t a shoo-in to cut, and in the end, the RBA chose caution over decisiveness.
- The RBA Monetary Policy Board defied widespread expectations and kept the cash rate on hold at its July 2025 meeting. The post-meeting statement noted the gradual recovery in private sector demand and a tight labour market as justification for the decision. It also said that the Board judged that it could wait for a “little more information”, which the Governor subsequently clarified included the quarterly CPI and another labour force release.
- In its May minutes, the Board had expressed a preference to be “cautious and predictable” in its conduct of monetary policy. Today it erred on the side of the former. The general tone of today’s post-meeting statement was of a central bank that has not been updating its view of the economy that quickly.
- The decision was split 6–3. In the post-meeting media conference, Governor Bullock emphasised that this was a question of timing, not direction. A majority of Board members simply opted to wait for more information, principally the Q2 CPI release.
- We read the tone of the media conference as flagging that the rate cut is still on for August, provided the trimmed mean inflation rate for June quarter does not surprise too much on the upside. Accordingly, we reinstate the likely timing of the next cut to August, though there is a small chance even this is delayed. We also retain the spread-out timing (November, February, May) of subsequent cuts as being in line with the cautious approach the RBA has flagged.
- At the media conference, the Governor confirmed that, should market pricing again move out of line with what the RBA ends up doing, the RBA will not use an inter-meeting speech to guide market expectations, as this would prejudge the Board’s subsequent decisions.
The RBA Monetary Policy Board has defied market pricing and the great majority of private sector economists’ views (including ours) by opting to keep the cash rate on hold at 3.85%. As we noted when we moved the expected August cut to the July meeting, cutting this month was not the ‘shoo-in’ that markets expected. The RBA has been a reluctant rate-cutter in recent months, especially earlier in the year. Still, the decision to hold is surprising, and the 6–3 split vote shows how finely balanced the decision was. Given the lack of consensus on the Board, the low information content of the post-meeting statement was not that surprising; this was the text a split Board could agree upon.
While votes are unattributed, we think it is unlikely that the external Board members all voted to hold while the Governor, Deputy Governor and new Treasury Secretary all voted to cut. It is more likely that the Governor, Deputy and some external Board members aligned to a staff recommendation to hold, but not all the external members were convinced to wait.
While underlying inflation is now clearly inside the 2–3% target range and headed down, the post-meeting statement chose to highlight the 2.9% year-ended rate for trimmed mean inflation as at the March quarter. More than half the information from this calculation is very stale data from the middle of last year. In the post-meeting media conference, the Governor claimed that other observers were more focused on headline inflation. In our view, this is a misreading of the current debate. Reasonable estimates of the current pulse of trimmed mean inflation – using either the monthly indicator trimmed mean or a shorter-run calculation on the quarterly data than a year-ended percentage change – are noticeably lower than 2.9%.
There is also little sign of an update in the RBA’s read of the economy in the rest of the statement text. The pick-up in private sector demand was again highlighted, even though the RBA had to revise down its near-term consumption forecast in successive SMPs. Weak productivity growth was cited twice despite the vagaries of measurement and the low information value it has for future inflation. In the media conference, the Governor discussed the “conundrum” that productivity growth has been weak and unit labour costs are strong, but inflation is coming down. We would argue that part of the issue has been compositional shifts in measurement, and part of it is that the RBA is over-indexing on the idea that prices are a (mostly constant) markup over costs.
The statement noted that “The Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis.” It is not clear why the currently available information was not enough to make this judgement. In the media conference, the Governor clarified that in five weeks’ time, the quarterly CPI, another monthly labour force release and refreshed forecasts would be available.
The main other lesson from today’s decision is the step change it implies for the RBA’s approach to communication. With the Monetary Policy Board more explicitly central to the decision-making process (in form only – they always were central in substance), the RBA Governor will be unwilling to push back on market pricing in between meetings because they will want to avoid pre-judging what the Board decides, or prejudicing the deliberations, at the next meeting. This means that episodes of the RBA surprising market pricing, as it has done today, will be more common. This is one of the downsides of the RBA Review recommendations. Not only are there fewer inter-meeting speeches by the senior officials now that there is a press conference instead, but those opportunities might also not be used to steer market pricing.
We read the tone of the media conference as flagging that the rate cut is still on for August, provided the trimmed mean inflation rate for June quarter does not surprise too much on the upside. Accordingly, we reinstate the timing of the next cut to August. We also retain the spread-out timing (November, February, May) of subsequent cuts as being in line with the cautious approach the RBA has flagged.
There is a (small) risk that even August is too soon for the RBA, if the CPI surprises on the upside. Our own current nowcast for June quarter is marginally above what their May SMP forecasts seem to imply. The Governor also mentioned that the data might come in slightly above their forecasts.
In addition, the spread-out timing highlights the risk that the RBA will be surprised on the downside by inflation later this year and need to catch up. This adds to the probability that our current base-case of 2.85% ends up being correct, rather than something higher.
