Australia’s economy needs fuel as RBA holds fire despite dovish shift
Michele Bullock’s communications strategy faces criticism after the Reserve Bank unexpectedly paused cuts despite previous dovish signals, raising questions about policy transparency.
The Reserve Bank has again found itself in an uncomfortable spotlight.
Criticism from economists is rising over what some see as inconsistent and confusing communications that have left borrowers and investors guessing.
After striking a remarkably dovish tone at its May meeting, the RBA board unexpectedly left the cash rate target unchanged this month, causing whiplash for market economists and households.
In May, with inflation falling to 2.9 per cent on an underlying basis and headline inflation at 2.4 per cent falling well within the target band, RBA governor Michele Bullock struck an almost triumphant tone.
Ms Bullock, who has been in the top job since September 2023, spoke of the RBA’s successful strategy of bringing inflation down “while avoiding a sharp rise in unemployment”, adding that “now we’ve got inflation down, we must keep it there while trying to maintain a health jobs market”.
“So, there’s now a new set of challenges facing the economy, but with inflation declining and the unemployment rate relatively low, we’re well positioned to deal with them.”
Ms Bullock said it was a “confident cut in the sense that we think this is the right decision at this point in time,” signalling that the central bank was comfortable with its easing trajectory.
She also said it was time to “retire the narrow path analogy now” referring to the strategy inherited from her predecessor Phil Lowe, of having interest rates just high enough to ensure that inflation gradually returns to the target band, without causing a spike in the unemployment rate.
“I don’t want to sort of suggest that I’m 100 per cent confident that we’re there, but it is really encouraging that we … have got inflation down, and we still have employment holding up, but this is not a situation that is going to just be the equilibrium, I think,” Ms Bullock said.
Referencing the RBA’s recent caution in hiking rates too much, she said tariffs were “a completely different shock, and it’s quite possible that the responses, the way we have to set monetary policy in this circumstance is quite different because the shock is quite different …”
Fast-forward just seven weeks, and the confidence on inflation and concern about tariffs has evaporated. Despite economic conditions evolving “broadly as expected,” according to the RBA’s own assessment, the board delivered a shock hold that caught 28 of 33 economists off guard.
Market reaction was limited, as Ms Bullock said it was “about timing rather than direction.”
But the inconsistency in tone was glaring when viewed through RBA’s own neutral rate framework.
When the RBA published its updated “neutral rate” estimates in May, much of the market’s focus was on the central estimate which was cut to about 2.7 per cent, or 1.15 percentage points below the current target of 3.85 per cent. But this month, the RBA seemed to look more at the fact that the cash rate target has hit the top end of its range of neutral estimates (0.7 per cent to 3.9 per cent).
Indeed, the board no longer referred to policy as “restrictive” in the July decision statement.
“We struggle to find a clear explanation in the post-meeting statement or the press conference for a decision that was materially at odds with market expectations,” said Deutsche Bank Australia chief economist Phil O’Donoghue.
The RBA’s justification for the July pause seems weak.
Ms Bullock cited concerns about “house building costs and durable goods” in the monthly CPI data, while acknowledged these figures are notoriously volatile and incomplete.
For a central bank that repeatedly emphasises the importance of quarterly data over monthly indicators, the reasoning feels unconvincing.
More troubling is the apparent disconnect between the RBA’s stated concerns about global uncertainty and the actual timeline of events.
In her July press conference, Ms Bullock suggested that “uncertainty about US tariff policy had fallen significantly since the May 20 decision.”
But the US and China had already reached their trade truce by 12 May, eight days before the RBA’s dovish May meeting. This raises uncomfortable questions about either the central bank’s awareness of global developments or the consistency of its messaging.
UBS economist George Tharenou said the decision to hold “contrasted with the RBA’s May meeting, which cut the cash rate by 25bps, and was surprisingly dovish by ‘considering’ 50bps.”
The speed of the reversal, from considering accelerated easing to unexpected restraint, has potentially undermined confidence in the RBA’s communications framework.
The introduction of vote disclosure, revealing a 6-3 split in favour of holding, was intended to enhance transparency but has instead highlighted the board’s internal divisions.
That three members voted to cut suggests the case for easing remained compelling, making the majority’s decision to wait appear more like an abundance of caution than economic necessity.
Ms Bullock’s defence that she can’t pre-empt board decisions rings hollow when the RBA’s statements and press conferences are supposed to provide guidance.
Financial markets function on predictability and clear communication.
When a central bank governor describes a rate cut as “confident” and discusses larger reductions, reasonable market participants will interpret this as guidance about future policy direction.
Perhaps most concerning is the apparent prioritisation of avoiding criticism over providing clarity.
The RBA seems to have retreated into a defensive crouch, unwilling to provide the forward guidance that markets and households desperately need. This overcautious approach may protect the central bank from being wrong, but it fails in its fundamental duty to communicate policy intentions clearly.
The consequences extend beyond market volatility to real economic effects.
Households planning budgets, businesses making investment decisions, and financial institutions managing risk all depend on clear central bank communications. When that communication becomes unreliable, it imposes costs on the entire economy.
As the RBA prepares for its August meeting, it faces a credibility test.
The economic data that supposedly justified July’s pause appears unlikely to show any dramatic deterioration that would warrant such caution. If the central bank fails to cut rates in August after building expectations for easing, questions about its communications strategy will only intensify.
The RBA has built considerable credibility through its successful navigation of the inflation challenge.
But credibility, once lost, is hard to rebuild. Clear, consistent communication is not just about market expectations — it’s about maintaining the trust that makes monetary policy effective.
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