RBA explains shock cash rate decision
The Reserve Bank has revealed why it chose to hold interest rates this month in its minutes for the July monetary policy meeting.
A cautious approach to inflation and global uncertainty were the key reasons behind the controversial hold at the RBA’s July meeting.
Economists were certain there would be a cut after inflation remained well within the 2–3 per cent target range, at 2.4 per cent.
However, underlying inflation remains in the upper end of the target range. While recent monthly consumer price index data showed some volatility, the board noted that trimmed mean inflation had not eased as sharply as some indicators suggested.
Additionally, surprises in new dwelling costs and consumer durables inflation in April raised questions about whether disinflationary momentum was as strong as previously expected.
The RBA expects headline inflation to temporarily rise towards the top of the target range in late 2025 due to the unwinding of energy subsidies.
However, the board remains confident that inflation will eventually settle around the midpoint, provided there are no further major shocks.
The Australian economy has shown resilience, but growth remains subdued. Private demand has recovered slightly, with stronger-than-expected household consumption and dwelling investment in early 2025.
However, public demand unexpectedly declined in the March quarter and per capita consumption has stagnated over the past year.
Labour market conditions remain tight, with low unemployment and underemployment rates, but wage growth and services inflation have moderated.
The board debated whether productivity growth, which has been persistently weak, could mean that recent subdued GDP growth is closer to the economy’s potential than previously thought.
Although financial markets have stabilised since earlier trade tensions, risks remain elevated. The US has begun implementing new tariffs, and geopolitical tensions in the Middle East and Ukraine persist.
While the worst-case global scenarios appear less likely than in May, the RBA noted that trade policy developments could still slow global growth in late 2025 and into 2026.
The RBA assessed that the current cash rate setting is still slightly restrictive based on:
- Neutral rate estimates – which suggest the policy rate is above the level required for a balanced economy.
- Household credit growth – which remains subdued despite earlier rate cuts.
- Debt repayment trends – where households continue to make extra mortgage repayments rather than increasing spending.
Given this, the board saw merit in waiting for more data before cutting rates again, ensuring that further easing aligns with sustainable inflation outcomes.
Despite this, one-third of the board voted in favour of cutting rates (three votes for, six votes against).
This division showed a clear disconnect between board members. The Australian Financial Review labelled it a “power struggle” between senior staff and a minority of the seven external board members.
Despite this, RBA governor Michele Bullock said the division was reasonable as people are entitled to different opinions.
The RBA’s decision reflects a careful balancing act, acknowledging progress on inflation while remaining alert to economic vulnerabilities.
With global uncertainty still elevated and domestic conditions sending mixed signals, the board has chosen a cautious path, keeping its options open for future adjustments.
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