Split Reserve Bank shocks economists, banks and households by holding rates steady

A split Reserve Bank has kept interest rates on hold for at least another five weeks, prompting claims it is adding to the financial pain of millions of Australians, as well as economic uncertainty already heightened by Donald Trump’s latest move on tariffs.

On a 6-3 vote, the bank’s interest rate setting committee held the cash rate at 3.85 per cent. Financial markets and most economists had expected the bank to slice rates by a quarter of a percentage point to follow on from a similar-sized cut in May.

Reserve Bank of Australia governor Michele Bullock after the RBA board decided to keep rates on hold.Credit: Dominic Lorrimer

It was the first time in the bank’s history that a vote on a rate decision was made public, revealing a split between those who wanted to stick at 3.85 per cent and those who believe more relief is needed due to easing inflation pressures and the threat posed by the Trump tariff agenda.

Governor Michele Bullock said while the bank did not cut rates on Tuesday, further rate relief was likely, with the outcome of the June quarter inflation report – released at the end of the month – the key factor.

“The decision today … was about timing rather than direction,” she said.

“We just want to confirm with a full quarterly CPI that we’re still on track to deliver inflation continuing down to the middle of the [2-3 per cent] band over time. That’s the reason we’re waiting on.”

The decision was taken after Trump revealed his plans to impose tariffs of between 25 per cent and 40 per cent on some of America and Australia’s largest trading partners. Those tariffs are due to start from August 1.

Bullock pushed back at suggestions the bank was not pushing ahead with a rate cut to keep its powder dry if international economic turmoil escalates, saying RBA was “in a great position”.

“I’m also really conscious that we don’t want to end up having to fight inflation again. We want to make sure we’ve nailed it.”

The surprise decision immediately pushed up the Australian dollar by more than a third of a cent against its US counterpart, while the ASX200 lost ground before making it up as Bullock signalled during her post-meeting press conference that a rate cut is likely in August.

By the end of Tuesday, financial markets had fully priced in an August rate cut.

Treasurer Jim Chalmers noted that the May monthly inflation figures showed both headline and underlying inflation in the bottom half of the RBA’s target band for the first time since August 2021.

He said people would be disappointed that the bank had not cut rates.

“There will be millions of Australians around the country who were desperately hoping for more rate relief today, in addition to the two rate cuts that we’ve already seen over the last five months,” he said.

Shadow treasurer Ted O’Brien said that under the Albanese government, interest rates had been too high for too long.

“Australian households are on their knees, industries are collapsing, businesses are falling over because Labor cannot manage the economy,” he said.

The bank noted in its decision that uncertainty about the global economy, the jobs market and inflation had all contributed towards its decision to hold.

But RSM Australia economist Devika Shivadekar said the decision itself would cloud household and business sentiment, adding to uncertainty within Australia.

She said at its May meeting, the bank had debated whether to cut interest rates by half a percentage point, twice the usual reduction. Yet in July, with inflation lower and ongoing economic softness, it had rejected taking official interest rates to 3.6 per cent.

“This abrupt shift in tone is difficult to reconcile and risks undermining confidence in the bank’s deliberations,” Shivadekar said.

“If the data has only improved since the last meeting, the decision to pause rather than act seems out of step with the RBA’s own stated concerns.”

Australian Industry Group chief executive Innes Willox said ongoing economic uncertainty at the domestic and international level was making it more difficult for businesses to invest.

“In the face of such uncertainty, the RBA’s caution in waiting to see clearer directions in the economic data is understandable,” he said.

“However, it equally points to the greatly heightened uncertainty in our economic outlook, which is a major inhibitor to the private sector investment needed to drive Australia’s recovery.”

AMP chief economist Shane Oliver said the bank had only reversed two of the 13 rate increases it had inflicted on home buyers in 2022 and 2023 to tame inflation, or just $2520 of the $16,800 in annual repayments on a $660,000 mortgage.

He said holding rates steady could force the Reserve to take more aggressive action if the economy continues to struggle.

“Delaying the next rate cut by five weeks won’t have a huge impact on the economic outlook, but it does risk seeing growth take longer to pick up to more normal levels with a risk that inflation could slip below target, necessitating more aggressive RBA rate cuts down the track,” he said.

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