The Reserve Bank of Australia has kept the official interest rate steady at 3.85 per cent. Photo: Michelle Kroll.
Interest rates remain on hold with the Reserve Bank of Australia acting against expectations to leave the cash rate unchanged at 3.85 per cent.
At its meeting on Tuesday (8 July), the RBA Board voted six to three in favour of keeping the rate steady.
It is the first time in its history that the RBA has published how the votes fell, which it did because it is also the first time the board has been split on the decision.
How individual board members voted, however, was not revealed.
It was widely anticipated the rate would be further cut to 3.60 per cent, but the central bank erred on the side of caution, citing international uncertainty and slow business recovery on the domestic front for its decision.
In her media appearance following the decision’s announcement, RBA Governor Michele Bullock said the bank had noted volatility in the monthly Consumer Price Index.
“The board decided to wait a few weeks to confirm that we’re still on track to meet our inflation expectation,” she said.
Earlier, the RBA board issued a statement outlining the reasoning behind the decision to keep interest rates on hold.
“Setting aside overseas developments, private domestic demand appears to have been recovering gradually, real household incomes have picked up and there has been an easing in some measures of financial stress,” the statement said.
“However, businesses in some sectors continue to report that weakness in demand makes it difficult to pass on cost increases to final prices.
“At the same time, various indicators suggest that labour market conditions remain tight.
“Measures of labour underutilisation are at relatively low rates and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers.
“Looking through quarterly volatility, wages growth has softened from its peak but productivity growth has not picked up and growth in unit labour costs remains high.”
The bank noted that “uncertainty in the world economy remains elevated” with the new US tariffs regime still to play out.
But it is anticipated that the impact on the Australian economy won’t be too harsh.
The bank said monetary policy was well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia.
A cautious approach to interest rates, however, was still deemed the most prudent path to take.
“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,” the RBA said.
“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.”
The RBA highlighted how inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance.
With the cash rate 50 basis points lower than five months ago and wider economic conditions evolving broadly as expected, the RBA board judged that it could “wait for a little more information” to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis.
“The board continues to judge that the risks to inflation have become more balanced and the labour market remains strong,” the RBA said.
“Nevertheless it remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and supply.”
A surprised and disappointed Treasurer Jim Chalmers fronted the media shortly after the RBA announced its decision.
He stressed the independence of the RBA and its decision-making processes.
“This is not the outcome that millions of Australians were hoping for, or the outcome that economists or the market were expecting,” Dr Chalmers said.
“I don’t second guess decisions taken independently by the Reserve Bank …
“The Reserve Bank statement makes it clear that we’ve made substantial and sustained progress in the fight against inflation and that’s why interest rates have already been cut twice in the last five months.
“As the Governor made clear in the statement, the board has decided to wait for more information in order to inform future decisions about interest rates.”
The Treasurer welcomed the fact the split vote was made public.
“This is quite a substantial change in the way that the Reserve Bank reports its decisions. I welcome the transparency that comes from the publication of those votes,” he said.
“Obviously, it will be a source of some interest that the Reserve Bank board was not unanimous on this occasion, that there were different views expressed around the boardroom table and we know that because of the publication of these unattributed votes.”
Original Article published by Chris Johnson on Region Canberra.
