‘Remains tight’: Why the RBA held interest rates in July

The Reserve Bank has revealed the reason behind its shock decision to hold the cash rate, leaving homeowners waiting a bit longer for much-needed relief.

A stronger than expected job market stopped the RBA pulling the trigger on a July rate cut, leaving struggling homeowners to wait a little longer for rate relief.

The central bank released its meeting minutes on Tuesday, showing the board decided to hold the cash rate despite inflation sitting within its target range.

“Recent monthly CPI indicator data – which can be volatile and do not cover all items in the CPI – were broadly consistent with this expectation,” the RBA board said.

But with more Australians currently in work, the RBA was wary the strong employment figures could lead to an increase in inflation.

“The labour market was assessed to have remained tight, with measures of labour utilisation little changed over the prior year,” it said.

“Growth in private demand had begun to recover, but was still subdued.”

The board voted 6-3 in favour of holding the cash rate. Picture: Christian Gilles / NewsWire

The RBA had to work with May’s unemployment figures, which showed just 4.1 per cent of eligible Australians were out of work.

When the June figures were released after the RBA meeting, it showed unemployment had jumped to 4.3 per cent, with 34,000 Aussies losing their jobs.

But households may not have to wait long for interest rate relief, with the RBA’s meeting minutes seemingly clearing the way for further rate cuts.

“All members agreed that, based on the information currently available, the outlook was for underlying inflation to decline further in year-ended terms, warranting some additional reduction in interest rates over time,” the RBA minutes said.

RBA governor Michele Bullock fronted a press conference after holding the cash rate at 3.85 per cent. Picture: NewsWire / Nikki Short

A cautious RBA monetary board held the official cash rate at 3.85 per cent following its July meeting, with the shock move defying expert commentators and predictions from the money markets.

The board voted 6-3 in favour of the hold.

“A minority of members judged that there was a case to lower the cash rate target at this meeting,” the board said.

“These members placed more weight on downside risks to the economic outlook – stemming from a likely slowing in growth abroad and from the subdued pace of GDP growth in Australia.”

Critics say the board is unlikely to learn anything by holding interest rates for a further five weeks. Picture: Christian Gilles / NewsWire

Fronting the media after the decision, Reserve Bank governor Michele Bullock said the votes were “unattributed” and declined repeatedly to reveal her position.

She said the board wanted to wait for the full quarterly data to be released by the Australian Bureau of Statistics.

“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.

Opinion remains divided as to whether the hold was the right decision.

Westpac chief economist Luci Ellis, who worked for the RBA for 15 years, says the central bank might have chosen to “assert its independence” by bucking expectations of a rate cut.

“There was no real economic benefit to waiting five more weeks,” Ms Ellis wrote in an economic note released last week.

While the decision may have left homeowners frustrated, Ms Ellis said it was a low-risk decision for the central bank from a broader economic perspective.

“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.”

The RBA will next meet on August 12, with money markets widely forecasting a rate cut.

Originally published as ‘Remains tight’: Why the RBA held interest rates in July