Jim Chalmers weaponises RBA split on shock rate hold, as Michele Bullock says nation hasn’t ‘nailed’ inflation

Jim Chalmers has weaponised a split vote of the Reserve Bank board, as governor Michele Bullock argued she was yet to be convinced inflation had been ‘nailed’.

Reserve Bank governor Michele Bullock and Treasurer Jim Chalmers on Tuesday. Picture: Christian Gilles, Martin Ollman / NewsWire

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Jim Chalmers has weaponised a split vote of the Reserve Bank board, declaring millions of Australians would be disappointed by its decision to keep interest rates on hold, as governor Michele Bullock argued she was yet to be convinced inflation had been “nailed”.

Ms Bullock said the decision to hold the cash rate at 3.85 per cent was about “timing rather than ­direction”, arguing financial traders pricing in a 96 per cent chance of a rate cut were too focused on the May monthly figures showing headline inflation had dropped to 2.1 per cent.

Admitting the decision was “cautious”, Ms Bullock said monthly figures were volatile and the central bank was looking through the headline inflation rate because of the impact of temporary government-funded electricity rebates due to run out at the end of the year.

Ms Bullock said underlying ­inflation had only been inside the RBA’s 2-3 per cent target for one full quarter, and the central bank preferred to wait for the release of the June quarter figures this month to be reassured about the trajectory of prices growth.

She signalled one issue of concern was wages growth outstripping productivity, with other risks to inflation including the tight jobs market and high building costs.

“A lot of people focused on the headline CPI number at 2.1 per cent, but we don’t think inflation in a sustainable way is that low – we think it’s higher,” Ms Bullock said.

“The decision today was about timing rather than direction.

“We don’t want to end up having to fight inflation again. We want to make sure we’ve nailed it.

“We’ve only had one quarter of underlying inflation, just back in 2.9 per cent (in the three months to March).”

Holding off a rate cut gave the Australian dollar a boost, jumping to US65.43c in late trading, up from US65.15c just before the RBA decision, while the sharemarket barely reacted with the S&P/ASX 200 closing 1.4 points higher, or 0.02 per cent, at 8590.7.

Financial markets have priced in a 91 per cent chance of a 0.25 percentage point rate cut at the bank’s August meeting.

Jim Chalmers on Tuesday. Picture: NewsWire / Martin Ollman

After declaring financial markets and economists were expecting a cut to the cash rate, the Treasurer said it would be a “source of some interest that the Reserve Bank board was not unanimous on this occasion” after a vote count was released for the first time.

The unattributed vote count – recommended by Dr Chalmers’ RBA review – showed six ­members of the board favoured holding the cash rate at 3.85 per cent while three members wanted a cut.

“There were different views ­expressed around the boardroom table, and we know that because of the publication of these unattributed votes,” he said.

“I think that transparency is a welcome change.”

Talking up the “substantial and sustained progress on inflation”, Dr Chalmers said the latest monthly figures showed headline and underline inflation were in the bottom half of the RBA’s target band for the first time since 2021.

While refusing to criticise the decision directly, Dr Chalmers said it was “not the outcome that millions of Australians were hoping for or the outcome that economists or the market (were) expecting”.

“I’ve been upfront in saying that this decision will come as a surprise to the market, has come as a surprise to the market and to almost every economist who’s expressed a view in recent days and weeks. Those are facts,” he said.

“It’s not for me to second guess the decisions that the Reserve Bank takes appropriately and independently.”

Dr Chalmers agreed the quarterly inflation figures were more reliable, saying the government was working with the Australian Bureau of Statistics to improve the quality of the monthly figures.

Ms Bullock said US President Donald Trump’s impending trade war was an economic threat that could accelerate the pace of rate cuts.

“If something really bad happens, we’ve got more room to move,” she said. “But we’re not deliberately holding interest rates high in order to give ourselves more power.”

Ms Bullock attributed the RBA’s split in the decision to readings on inflation that were still being made unclear by government subsidies.

“The difference between the two camps really was down to a slightly softer reading ... those who wanted to cut had a slightly softer reading of the data than those that wanted to hold,” she said.

“It’s really important for people to have stable inflation expectations, and one of the best ways to deliver that is to have a central bank that you trust to be focused on keeping inflation low and stable.”

Backing the economic reform roundtable to be held in August, Ms Bullock said the RBA was “looking very actively at productivity” growth which is now at 60-year lows and a drag on GDP.

“We are thinking about whether or not the assumptions that we typically think about are still relevant, and that’s ongoing work for us,” she said.

“What you would expect if productivity is not growing very quickly then wage growth will actually adjust to the lower rate of productivity growth.

“At the moment, I am participating in the roundtable. I’ll be there talking more about setting the scene for what’s the context and why it is important.”

Some of the RBA’s board raised concerns at the meeting about the hit to the economy that Mr Trump’s tariffs would have.

Ms Bullock said there was “a little bit more concern about the downside risks, particularly on the international side”, from some of those board members.

Oxford Economics head of economic research Harry Murphy Cruise said there should have been a rate cut to ensure the economy had stronger momentum if Mr Trump’s trade wars led to a global meltdown.

However, BetaShares chief economist David Bassanese, who correctly predicted the hold decision, said the conditions did not yet require a cut.

“I have consistently argued in recent weeks, the case to cut rates today was never compelling,” he said.

“While consumer spending remains stubbornly weak, the labour market remains strong.

“And while the recent monthly CPI report showed a large decline in annual trimmed mean inflation to 2.4 per cent, monthly reports are notoriously volatile.”