Reserve Bank’s surprise hold masks continued dovish bias as August cut remains on cards

The central bank’s dovish bias is firmly intact, but the key question now is whether its cautious approach risks allowing economic momentum to stall.

Home building costs and durable goods prices were cited by RBA governor Michele Bullock. Picture: AAP

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The Reserve Bank surprised economists with its decision to keep the cash rate target unchanged at 3.85 per cent on Tuesday, but the central bank’s dovish bias is firmly intact.

In her post-decision press conference, governor Michele Bullock said repeatedly that it was a decision about timing, not direction.

“What we are not debating is where we think directionally we’re going,” she said, provided inflation and unemployment continued tracking RBA forecasts.

The decision split the nine-member board 6-3, marking the first time the RBA has published unattributed voting records. This division showed significant internal debate about the appropriate pace of policy normalisation, with three members presumably favouring another immediate cut.

The RBA’s caution stems primarily from some components of recent monthly inflation data that came in “at the margin, slightly stronger than expected.”

Home building costs and durable goods prices were cited by Ms Bullock, but she was quick to note the inherent volatility in monthly readings compared to the more comprehensive quarterly data.

By August, the RBA board will have the June quarter CPI data, another employment report, and fresh economic forecasts. Most importantly, it will know whether underlying inflation continues its descent towards the 2.5 per cent target.

“The bank’s decision to leave the cash rate unchanged came as a surprise,” says Marcel Thieliant from Capital Economics. “Even so, business surveys suggest that inflationary pressures will remain soft. Barring a major upside surprise in the June quarter inflation data, we still predict a cut at the bank’s next meeting in August.”

The economic backdrop supporting further easing remains compelling.

Consumer spending continues to recover more slowly than the RBA initially expected, despite improving real incomes. The central bank acknowledges that businesses in some sectors still struggle to pass through cost increases to final prices, suggesting persistent weakness in underlying demand.

Meanwhile, the cash rate remains near the top end of the central bank’s estimates of the “neutral rate”.

This policy retains a restrictive bias even after the 50 basis points of cuts delivered since February.

Global uncertainties also weigh on the outlook, though perhaps not as heavily as feared.

While US President Donald Trump’s trade tensions initially spooked markets, Ms Bullock noted that “the likelihood of a ­severe downside scenario … has abated” as extreme tariff outcomes appear less likely.

NAB head of Australian economics Gareth Spence said: “We continue to see the need for the RBA to normalise rates, with consumption so far having recovered more slowly than earlier expected and amid global downside risks.

“NAB continues to expect cuts in August and November and have added a cut in February.”

The labour market is a complicating factor for rate cuts. Jobs continue growing and measures of underutilisation remain low, yet productivity growth remains stubbornly weak.

This combination keeps unit labour costs elevated, creating a potential inflation risk that clearly weighs on the RBA’s thinking. But wages growth has moderated from its 2023 peaks without triggering the previously feared wage-price spiral. The unemployment rate sits at 4.1 per cent – historically low but not showing signs of unsustainable tightness.

AMP says the property market could see some near-term cooling as buyers reassess their expectations. Picgture: AAP

Financial markets had priced in a 90 per cent probability of a July cut, making the decision to hold fairly jarring. But the sell-off in rate-sensitive assets may prove short-lived if, as expected, the RBA resumes easing in August. The ASX recovered from an intraday dip as US futures rose slightly after Mr Trump said his new August 1 tariff date was “not 100 per cent firm”.

Betashares chief economist David Bassanese said: “This is very much a rate cut delayed not ­denied. Assuming annual trimmed mean inflation in the June quarter CPI report is no more than 2.7 per cent, I fully expect the RBA to cut rates at the August policy meeting.”

AMP said the property market could see some near-term cooling as buyers reassessed their expectations. Recent momentum in home prices and auction clearance rates may moderate as rate cut expectations are pushed back, though the fundamental drivers of housing demand remain supportive, according to AMP chief economist Shane Oliver.

Most still see the terminal cash rate settling around 2.85-3.1 per cent by mid-2026, giving a slower easing cycle than seen in other developed economies that reflects Australia’s resilient economic per­formance and the RBA’s pref­erence for measured policy adjustments.

The key question is whether this cautious approach risks allowing economic momentum to stall. With growth already below trend and inflation back within the target band, some argue the RBA should be moving more aggressively to support activity.

But the RBA board appears comfortable with its gradualist strategy, having avoided the sharp economic contractions seen elsewhere while successfully bringing inflation under control.

As Ms Bullock noted, “we didn’t take rates as high as some other countries, and so it may be that we don’t need to reduce rates as much.”

The August meeting looms as the moment of truth.

If June quarter inflation data confirms the disinflationary trend, the RBA will quickly resume its easing cycle. If not, borrowers may need to wait longer for meaningful mortgage relief.