RBA Can’t Get No Satisfaction

Despite the market having the probability of a 25 bps cut at 97%, the RBA decided to keep the rate on hold at 3.85%. The decision was 6 in favour and 3 against.

Both headline inflation and the RBA’s preferred measure trimmed-mean inflation are currently in the target band of 2% to 3% but the Monetary Policy Board is not yet satisfied that either will stay there, or perhaps it is more the case that it is not satisfied in the data available to it.

What the RBA’s Statement said

“While recent monthly CPI Indicator data suggest that June quarter inflation is likely to be broadly in line with the forecast, they were, at the margin, slightly stronger than expected. 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…”.

“While the final scope of US tariffs and policy responses in other countries remains unknown, financial market prices have rebounded with an expectation that the most extreme outcomes are likely to be avoided.”

“... labour market conditions remain tight ... wages growth has softened from its peak but productivity growth has not picked up and growth in unit labour costs remains high.”

Statement by the Reserve Bank Board: Monetary Policy Decision, 8 July 2025.

https://www.rba.gov.au/media-releases/2025/mr-25-17.html

What the governor said at the press conference

“Monetary policy has been working as expected and we have made good progress in bringing inflation down over the last 18 months but quarterly trimmed-mean inflation has only been in our 2% to 3% target range for one quarter…”

“The data and policy outcomes around the world since the May meeting have been close to what we expected in our latest baseline forecasts published in May.”

“We are waiting to confirm whether inflation is still on track to sustainably reach 2.5%.”

“Since our May meeting the two monthly CPI indicators have been broadly consistent with our forecast for headline inflation and show that we are moving in the right direction. However, some components suggest that underlying inflation in the June quarter could be a little higher than forecast.”

“At our next meeting in five weeks we will have the June quarter CPI, another labour market reading, further information about international developments, and an updated set of forecasts so the Board decided to wait a few weeks to confirm that we’re still on track to meet our inflation and employment objectives.”

“The likelihood of a severe downside scenario associated with a trade war, which we set out in our May statement, that likelihood has abated but this is a very fluid situation. ”

“... the decision today was about timing rather than direction.” 

“... what we’re looking for is confirmation that we are on our forecast path.”

“... monthly CPI, which some people quote 2.1% but I don’t think it is really there but that’s actually an artifact of certain subsidies … they will roll off.”

“I think Australia has done remarkably well, who would have thought 2-years ago that we would be sitting here now with inflation at 2-something and unemployment at 4.1%, not many people…”

Disappointment

“Not the result millions of Australians were hoping for.” Jim Chalmers, Australian treasurer.

As the chart below shows, the market was near 100% convinced that the RBA would cut rates by 25 bps on Tuesday. According to a survey by the Australian Financial Review, 32 of 36 economists expected a cut.

ASX RBA Rate Tracker

There was good logic behind the expected cut. The March-quarter CPI and trimmed-mean CPI, released in late April,  were both within the RBA’s 2% to 3% band and recent monthly indicators showed a continuing downward trend (see chart below). Further, the RBA had revised down its inflation forecasts in May and at her last Monetary Policy Decision press conference, Bullock assured the media that the RBA would look to cut rates further if inflation continued to fall sustainably. Everything looked set for a rate cut.

However, the Monetary Policy Board surprised nearly everyone on Tuesday when it decided to keep the official cash rate unchanged. Bullock indicated that the Board is not completely convinced that inflation will stay down, citing some increases in components of May’s monthly CPI indicator. In particular, she pointed to the end of electricity subsidies for consumers. According to the ABS, household electricity prices would have increased 17.7% rather than the actual 1.1% since June 2023 if not for the subsidies.   

Better data

The Board’s concern over May’s monthly inflation indicator is not the full story nor does Bullock’s argument that "reasonable minds can differ” hold water . Rather the decision to hold is a symptom of a deeper issue.

Bullock and the RBA don’t trust the monthly inflation indicator. Many fellow OECD countries like the US, UK, Canada, and the EU have accurate monthly inflation data. Australia does not. The Australian Bureau of Statistics is working on an accurate monthly series but it is not expected to be ready “until late 2025”. It introduced the current monthly CPI indicator in October 2022.

In the meantime, Bullock and the Board are often quite happy to defer their decisions until after quarterly-inflation data comes out. The last 3 interest rate changes, going back to November 2023, were made in the Board meetings immediately following the release of quarterly inflation.

“The number we like to see is the quarterly [CPI] because that gives us the best read, and this of course is our problem because we only get 4 readings a year and it is very difficult on 4 readings a year to get an idea on the momentum of inflation.” Michele Bullock, 8 July, 2025, Monetary Policy Decision press conference.

So where does this leave us? Well, keenly waiting for the release of the June-quarter inflation on the 30 July.

But it is important to remember that the RBA has already cut rates by 50 bps this year and the full impact of these are still working their way through the economy. Despite the hold, the Board also remains on dovish footing.

Australian Private Debt Market

Despite the disappointment of a rate cut deferred, the Australian economy is in good shape. Inflation is light years from the highs of late 2022 and the RBA has been able to avoid recession. It is also well positioned to react to any impact from US tariffs on China.