‘Soul crushing’: Why RBA made shock call to hold interest rates

The Reserve Bank Governor has revealed why it made the ‘soul-crushing’ decision to keep interest rates on hold despite a cut being widely tipped and an economy ‘on life support’.

Homeowners have been left frustrated after the Reserve Bank announced its decision to leave the cash rate unchanged despite a cut being widely tipped.

The RBA handed down its decision on Tuesday afternoon – a move which has been described as “soul crushing” for homeowners desperately needing mortgage relief.

It is at odds with key economists and all four major banks who previously predicted a cut of 25 basis points.

The cash rate will remain at 3.85 per cent.

RBA governor Michele Bullock has fronted the media to explain the reason for the decision, saying the fight against inflation was ”still on track” but needed to be nailed before another rate cut.

“The decision today was about timing rather than direction,” she said.

The ASX dipped 21 points as the RBA announcement dropped at 2.30pm.

Graham Cooke, head of consumer research at comparison website Finder, said Tuesday’s decision would not be popular.

“There is still a portion of homeowners who are in severe mortgage stress doing it tough,” he said

“It’s soul-crushing when you think relief is coming only to find that you need to wait another couple months.

“Cut or not, there is still a significant difference between the average and lowest rate available.

“You can potentially give yourself nearly two rate cuts by getting on the front foot and switching.”

Mortgage holders will now have to wait until August at the earliest to get further interest rate relief.

More than 90 per cent of economists had expected the RBA to cut rates – and the market had similar expectations.

The ASX 30 Day Interbank Cash Rate Futures, a financial product that lets traders bet on what the official interest rate will be at a future date, was trading at 96.34 as of Monday – indicating a 97 per cent expectation of an interest rate decrease to 3.60 per cent on Tuesday.

Michele Bullock has explained why the cash rate will remain unchanged. Picture: NewsWire / Nikki Short

THE RESERVE BANK’S REASON FOR HOLDING RATES:

RBA governor Michele Bullock said the board was waiting to confirm whether inflation was “still on track”.

“The board decided to wait a few weeks to confirm that we’re still on track to meet our inflation expectation,” she said.

“This is a very fluid situation and we will continue to watch the data here and overseas to see how it plays.

“We must keep inflation down while trying to keep a healthy job market.”

Ms Bullock did acknowledge that homeowners with mortgages would be let down from Tuesday’s decision.

“(But) I am also really conscious that we don’t want to have to fight inflation again. We want to make sure we’ve nailed it,” she said.

“The decision today was about timing rather than direction.”

Ms Bullock wouldn’t confirm whether Australians could expect a rate cut larger than 25 basis points in August.

She said the split in votes from board members was a reflection of “really good active debate” and refused to reveal how she voted.

At the time of announcing the decision, the Reserve Bank board issued a statement saying while inflation was falling, they wanted to wait for a “little more information” before cutting rates.

The Reserve Bank has announced their decision to leave the cash rate unchanged.

“Uncertainty in the world economy remains elevated,” they said.

“While the final scope of US tariffs and policy responses in other countries remains unknown, financial market prices have rebounded with an expectation that the most extreme outcomes are likely to be avoided.

“Trade policy developments are nevertheless still expected to have an adverse effect on global economic activity, and there remains a risk that households and firms delay expenditure pending greater clarity on the outlook.”

They said inflation had fallen substantially since the peak in 2022.

Head of Deloitte Access Economics Pradeep Philip said a “cautious” RBA voted in favour of a “wait-and-see-approach” to inflation, rather than cutting rates to bolster economic growth.

He said over recent months, the World Bank, the International Monetary Fund, and Organisation for Economic Co-operation and Development had all lowered global growth forecasts, primarily based on trade uncertainty.

“We are now in a world where geopolitics is driving economics,” he said.

“In this context, a rate cut would have been a sensible move akin to taking out insurance to support the Australian economy by helping rebuild business confidence to drive investment.

“Domestically, with inflation continuing to come down and government spending still supporting the economy, our biggest economic challenge remains boosting business investment to lift productivity.

“This provides a clear case for the continued easing of monetary policy.”

TREASURER JIM CHALMERS ‘SURPRISED’ BY DECISION

Treasurer Jim Chalmers acknowledged that mortgage holders would be shocked and were wanting “more relief”.

“This decision has come as a surprise to the market and every economist that has expressed a view in recent weeks,” he said.

“Interest rates have come down twice in five months but we know the job isn’t finished … the global environment is uncertain, as recognised by (the RBA) today.”

Mr Chalmers welcomed the RBA’s decision to publish its unattributed record of votes for the first time.

The board said Tuesday’s policy decision was voted by six in favour and three against.

“I welcome the transparency that comes from the publication of those votes,” he said.

Federal Treasurer Jim Chalmers was shocked by the decision. Picture: Martin Ollman

‘UNNECESSARY SUFFERING’ AS ECONOMY ON LIFE SUPPORT

Senior economist at The Australia Institute Matt Grudnoff said the RBA’s decision caused “unnecessary suffering” for Australian borrowers.

“The high interest rates are slowing the Australian economy at a time when economic growth is on life support,” he said

“With the inflation rate within the target band, what more information does the RBA need to cut rates?

“This decision comes with real costs. Households are struggling to pay the bills, and this delay will only cause more pain.”

Mortgage expert from money.com.au, Debbie Hays, said the board’s call was unexpected.

“It’s not often the big four (banks) and markets miss the mark — but this time, they all misread the room. In fact, we all did,” she said.

“The RBA clearly wasn’t ready to pull the trigger on another cut. For borrowers, that means no extra breathing room on repayments just yet.

“Given the elevated uncertainty in both global markets and domestic demand, the RBA is taking a cautious approach.”

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RATE HOLD ‘RELIEF FOR SOME’

Queensland Investments Commission chief economist Dr Matthew Peter said the decision would come as a relief to some households who would not have benefited from a cut.

“Since the RBA’s last rate cut in May, Brisbane house prices are already up by around 2 per cent as buyers jump back into the market,” he wrote.

“We estimate that a three per cent increase in house prices would wipe out the benefits of 25 basis point cut by the RBA on Tuesday for the majority of first home buyers.

“A recent RBA study showed those most negatively impacted by lower rates are older households, aged greater than 65 years, while those most likely to benefit are 30-54 year-olds due to their high mortgage exposure.”

WHAT’S NEXT?

The decision has shocked experts who were expecting a 25 basis points cut.

Experts are predicting future rate cuts this year.

Deutsche Bank Research chief economist for Australia Phil O’Donaghoe said he expected a further 25 basis points cut in August, followed by another 25 basis points cut in November.

Mr O’Donaghoe said he predicted a terminal rate – the final or lowest rate expected in a rate-cutting cycle – of 3.1 per cent.

“Our terminal rate this easing cycle remains at 3.1 per cent, so we now see the RBA arriving there in November, rather than February,” he said.

Experts are also predicting future rate cuts this year.

EXPERT ADVICE FOR AUSSIES UNDER MORTGAGE STRESS

One in three homeowners say they struggled to pay their home loan in June, new data from Finder reveals.

Matt Turner from mortgage broker GSC Finance Solutions said it was important to speak to your bank or broker.

“There are things that can be done to assist you – hardship provisions are one option, restructuring debt, setting budgets, even looking at selling/downsizing debt to make things more comfortable,” he said.

Professor Mark Crosby from Monash University urged homeowners to get ahead of their mortgage repayments wherever possible.

“The house is likely to be the biggest investment that you will ever make, so every payment is increasing your wealth and reducing your future obligations,” he said.

Originally published as ‘Soul crushing’: Why RBA made shock call to hold interest rates