Board votes 6-3 on holding cash rate at 3.85%
The Reserve Bank of Australia (RBA) made an unexpected decision to hold interest rates at 3.85% on Tuesday, despite market consensus pointing to a 25-basis-point cut.
In a first the Monetary Policy Board, the central bank published a voting record, showing that the hold went through on a 6-3 vote majority.
This brings the RBA in line with its UK counterparty the Bank of England (BoE), which has been disclosing its voting record for decades. However, at the time of writing and unlike the BoE, the individual votes were not attributed to each Monetary Policy Board member.
The 6-3 split nonethless suggests that a sizeable hawkish faction remains in the RBA’s ranks.
In a statement following the surprise hold, the Board highlighted that inflation has fallen substantially since the 2022 peak, “as higher interest rates have been working to bring aggregate demand and supply closer towards balance”.
Headline inflation reached the 2.9% target range midpoint in the March quarter, while recent monthly consumer pricing data pointed to inflation being broadly in line with forecasts.
However, “they were, at the margin, slightly stronger than expected”, said the Board, continuing: “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 Board reiterated the widely parroted view that “uncertainty in the world economy remains elevated”.
Internationally, unresolved trade policies and their effects on global growth are a concern and while domestic while household incomes have improved and financial stress has eased, some businesses still find it difficult to pass on costs due to weak demand.
Labour market conditions remain tight, added the Board, but productivity growth is weak and unit labour costs are high.
“The Board will be attentive to the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.
“The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome.”
Economists will now be weighing up what this surprise hold means for end-of-year rate projections.
While the banking Big Four – ANZ, NAB, Westpac and Commonwealth Bank – broadly anticipate the cash rate to fall in the 3.1% and 3.35% ballpark by the time 2025 draws to a close, they could find themselves reassessing their targets going forward.
The next RBA rate call is due on 12 August.
