RBA Holds Cash Rate Steady at 3.85% Amid Mixed Signals on Rate Cuts
In a surprising move, the Reserve Bank of Australia (RBA) has decided to maintain the cash rate at 3.85% during its latest meeting. This decision defied market expectations, which had anticipated a rate cut, with many economists forecasting a reduction as early as August.
RBA Governor Michele Bullock acknowledged that households were hopeful for a rate decrease during this meeting. However, she stated that the Board opted to “wait a few weeks” to ensure inflation trends align with their targets before making any cuts. Bullock hinted at a potential easing cycle once inflation statistics are confirmed, but further cuts may not be imminent.
Warren Hogan, Chief Economist at Judo Bank, remarked that market pricing suggested a 90% likelihood of a cut today, labelling the anticipated adjustment as a “slam dunk”. However, he cautioned that while the RBA appears to be considering a cut for August, expectations of multiple consecutive cuts might be overly optimistic. "The market’s probably getting a little bit ahead of itself in pricing in four," Hogan noted and speculated that further cuts could be limited.
Hogan pointed out that while the economy seems to be on a gradual recovery path, constraints such as elevated business costs could hamper momentum. If businesses begin to pass these costs onto consumers, it could reignite inflationary pressures, potentially leading to future rate hikes.
Despite a decline in inflation over the past year offering RBA some leeway for initial cuts, Hogan emphasised that the next major move in rates will be influenced by economic performance, which remains uncertain.
Similarly, AMP Chief Economist Shane Oliver, who had anticipated a 0.25% cut at today’s meeting, suggested that a slower pace of rate reductions is now more likely. He continues to predict a total cut to the cash rate of 2.85%, albeit over a more extended timeframe.
Oliver mentioned that while the RBA’s current stance is proving more conservative than initially expected, he expects further reductions in the coming months as economic growth unfolds at a slower rate than the RBA’s projections.
The RBA’s decision was notably not unanimous; the Board reported a vote of six in favour and three dissenting. Hogan interpreted these dissenting opinions as a sign that the RBA is close to making a cut. He called for more transparency in the voting process, advocating for the disclosure of dissenting opinions alongside the votes to help the public understand differing perspectives on monetary policy.
As the market continues to react to the RBA’s announcements and the economic climate evolves, both borrowers and businesses will need to stay informed about potential changes in the interest rate landscape in the coming months.
