The Reserve Bank of Australia (RBA) Board decided to leave the cash rate unchanged at 3.85% at its July meeting, breaking away from market expectations for a cut.
Leading into the meeting, the consensus was pricing a 97% chance of a cut, given inflation had fallen into the RBA’s target band and increasing concerns regarding the evolving risks globally.
Key changes from the May statement were as follows:
- Reaffirmed that inflation continues to moderate; however, noted that while June quarter inflation is expected to be within the target band, it is still tracking slightly stronger than expected. The board decided to wait for “a little more information” to confirm that inflation remains on track to reach its 2.5% target on a sustainable basis.
- While financial markets have rebounded reflecting an expectation that extreme outcomes are likely to be avoided, trade policy developments are still expected to have an adverse effect on global economic activity.
- The Board removed a statement about employment continuing to grow, suggesting pressure is easing; however, continued to note that availability of labour is still a key constraint for a range of employers.
- Wages growth has softened from its peak, but productivity has not picked up and growth in unit labour costs remains high.
- The outlook for labour remains mixed, as aggregate demand may be slower than expected, which would likely result in a sharper deterioration in labour markets, providing scope for cuts.
- Noted weak continued productivity outcomes would create uncertainty in the lag effects of monetary policy.
The Board judged that while risks to inflation had become more balanced with upside risks to inflation diminishing, the labour market remains strong, providing scope to wait for more data before the next rate cut.
The Board also broke from their own tradition to include the voting outcome from the decision – 6 in favour, 3 against. An interesting development.
Following the announcement, Australian equities fell, Australian bond yields rose (prices lower), and the AUD/USD rose at the time of writing.
At the May meeting, the Board’s tone and rhetoric didn’t seem to imply a rush to cut rates further, proving this patience in its decision today.
