The Reserve Bank of Australia (RBA) was expected to slash interest rates by .25 per cent today. Instead, it kept the cash rate steady at 3.85 per cent – despite 31 of 37 economists predicting homeowners would get mortgage relief this week.
Key Takeaways
- The RBA says it will continue to monitor inflation, citing global uncertainty and the potential for trade developments to create adverse economic effects.
- It was expected to cut the official cash rate this Tuesday at its monetary policy meeting.
- The RBA acknowledged the decision was not unanimous with members six voting to hold rates – against three who were in favour of a cut to the cash rate.
- Banks were predicting a 25-basis-point (0.25%) cut, which will bring the cash rate to 3.6% from 3.85%.
- It comes as the ABS monthly Household Spending Indicator rose by 0.9% in May.
- An earlier Reuters survey saw 31 of 37 economists predict a rate cut this week.
Crucial Quote
“It’s not the result millions of Australians were hoping for or what the market was expecting,” Federal Treasurer Jim Chalmers said following the announcement. “We have made substantial and sustained progress on inflation which is why interest rates have already been cut twice in five months this year.
Key Background
The decision to keep the cash rate steady at 3.85% was not one expected by economists – and a further blow to Australian homeowners.
The RBA also acknowledged the decision was not unanimous with members six voting to hold rates – against three who were in favour of a cut to the cash rate.
“I think the fact that the Reserve Bank board was split on this occasion, that there wasn’t a unanimous view is a a signal that these decisions are deliberated and debated on properly,” Chalmers said.
The RBA last slashed rates in May, basing its decision on moderating inflation and an uncertain economic outlook. The easing was welcomed by mortgage holders, who stood to save about $101 a month on a $660,000 home loan.
“We are now in a world where geopolitics is driving economics,” says Pradeep Philip, the head of Deloitte Access Economics. “In this context, a rate cut would have been a sensible move akin to taking out insurance to support the Australian economy by helping rebuild business confidence to drive investment.”
Earlier this week Commonwealth Bank economist Belinda Allen said the bank brought its expectations for a cash rate cut forward from August to July, following the RBA’s ‘dovish’ message at the May board meeting.
“The decision to cut the cash rate in July will still be a close one,” Allen said prior to the decision. “We expect there to be a discussion of both leaving the cash rate on hold and cutting by 25bp. The case to leave the cash rate on hold would be around diminished trade uncertainty since the heightened May environment, a still tight labour market and wanting to see a full quarterly CPI print. We expect though a 25bp cut will make the stronger argument.”
RBA Statement
“With the cash rate 50 basis points lower than five months ago and wider economic conditions evolving broadly as expected, 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,” the RBA stated Tuesday.
“Uncertainty in the world economy remains elevated. Trade policy developments are nevertheless still expected to have an adverse effect on global economic activity, and there remains a risk that households and firms delay expenditure pending greater clarity on the outlook.”
Big Number
3.1% – the projected cash rate floor by early 2026, according to analyst forecasts.
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