RBA rate pause had ‘no real economic benefit’: Westpac

Struggling mortgage holders could be waiting an additional five weeks for a rate cut just so the RBA can prove its independence, a former employee says.

Former employee Luci Ellis says a cut would’ve been a rounding error. Picture: NewsWire, Monique Harmer

One of Australia’s big four banks has offered a surprising theory as to why the Reserve Bank shocked everybody by holding rates at its last board meeting.

Westpac chief economist Luci Ellis says the RBA might have chosen to “assert its independence” by bucking expectations and keeping the official cash rate at 3.85 per cent at its July board meeting.

“There was no real economic benefit to waiting five more weeks,” Ms Ellis wrote in her latest economic note.

While homeowners were left frustrated after the RBA announced its decision to leave the cash rate unchanged despite a cut being widely tipped, Ms Ellis said it was low risk decision for the central bank from a broader economy point of view.

“The dirty little secret of monetary policy is that small differences in the level of interest rates or the timing of changes make essentially no difference for inflation outcomes,” Ms Ellis said.

“If holding the cash rate 100 basis points lower for a year only boosts inflation by 0.2 per cent or so – broadly the result from the RBA’s main model – then 25bp higher for five weeks is not even a rounding error.”

RBA governor Michele Bullock defended the decision to keep the rate on hold, saying the central bank was waiting for quarterly inflation data. Picture: Christian Gilles / NewsWire

RBA governor Michele Bullock said after the decision was announced that the board wanted to see the June quarter’s inflation numbers – to be released by the Australian Bureau of Statistics next Wednesday – before moving on rates.

The RBA monetary policy board meets again in August, with the rate decision to be announced on Tuesday August 12.

“By then we will know what the June quarter CPI is and if it comes in as we think it will, a little bit at the margin, we’re a little bit worried about, but if it comes in as we think it will, continue to decline, then that validates our easing path,” she said.

But Ms Ellis took a swipe at Ms Bullock’s argument.

“The third month of CPI data will also not add much new information to support a continuing hold,” she said.

“Recall that even with a partial monthly CPI indicator, once the second month of the quarter is in, you already have two-thirds of the ultimate quarterly read.

“This is true no matter how much of the index is measured monthly.”

Former employee Luci Ellis says a cut would’ve been a rounding error. Picture: NewsWire, Monique Harmer

Markets are now pricing an almost 100 per cent chance of a 25 basis point cut in August following Thursday’s weaker than expected jobs figures.

The unemployment rate rose to 4.3 per cent in June, beating market expectations of 4.1 per cent, according to the ABS.

IG market analyst Tony Sycamore said the bond market was quick to react to Thursday’s data, moving up expectations of a rate cut from 80 to nearly 100 per cent in August.

“Today’s rise in the unemployment rate pushes it above the RBA’s forecast of 4.2 per cent for June 2025 and meets the 4.3 per cent rate the RBA expected by year end,” he said.

“Combined with last month’s fall in employment, there are clear signs of deceleration emerging in the labour market.”

Betashare chief economist David Bassanese, who was of the few to predict the RBA would keep the cash rate on hold in July, said Thursday’s unemployment data was a “slam dunk” for an August rate cut.

“We’ll need more consistent signs of weakness in both employment and hiring indicators before we can conclude the labour market is turning,” he wrote in an economic note.

“That said, today’s result clearly adds to the case for a RBA rate cut at the August policy meeting provided next week’s Q2 CPI report is not a shocker.”