Households with a mortgage have been left frustrated and economists baffled following the Reserve Bank’s decision to hold the cash rate steady at its July meeting.
Markets had priced in a 96% chance of a cut, before an atypical turn of events saw the bank fly in the face of all expectation and leave the official rate at 3.85%.
A 25 basis point cut to the cash rate would have given borrowers interest rate relief of around $80 a month on a $500,000 mortgage and savings of around $3,600 a year when combined with the previous two rate cuts seen in February and May.
Many will no doubt be feeling left out in the cold this winter on the back of the Reserve Bank of Australia’s surprise July interest rate decision, with borrowers now looking to August for a rate cut.
The Australia Institute senior economist Matt Grudnoff has called the July meeting a “missed opportunity” to take pressure off families.
“The Reserve Bank’s decision to keep interest rates on hold at 3.85% means more unnecessary suffering for Australian borrowers,” he added. “This decision comes with real costs.”
While many Aussie homeowners are struggling to pay the bills, RBA governor Michele Bullock has kept the door open for further easing this year.
Addressing media, she said the board was not misaligned on the direction of rates, but rather the timing of cuts.
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Governor Michele Bullock said the RBA board needed more certainty on the trajectory of inflation before making further rate cuts. Picture: News Corp Australia
Mediocre inflation data and US tariffs appear to have formed the bulk of the RBA’s uncertainty contributing to its decision to hold fire on changing the cash rate.
Inflation uncertainty
In its statement accompanying the hold decision, the board confirmed it was looking for more certainty around the ability to softly land inflation back in the middle of its target range.
Ms Bullock pointed to limitations in the Australian Bureau of Statistics’ monthly headline numbers, saying they are “too mixed up” to paint a reliable picture of the economy.
Trimmed mean inflation, the board’s preferred measure of play, has only been within the RBA’s 2-3% inflation target for one quarter. Ms Bullock signalled the next release of this data from the ABS on 30 July will allow the board to more clearly understand whether inflation is stable to the degree it wants.
“Economic conditions remain uncertain, and we are waiting to confirm whether inflation is still on track to sustainably reach 2.5%,” she said.
The governor said the effects of the February and May rate cuts would also become clearer after the next quarterly data and defended the board’s timeline for making a third cut.
Treasurer Jim Chalmers said the bank’s decision had caught both the industry and the nation off guard.
“I think it’s certainly the case that the market was surprised. I think certainly economists were surprised by the outcome,” he said. “I think it’s fair to say as well millions of people who were expecting more rate relief yesterday and didn’t get it.”
Waiting game
The July meeting marks the first time the RBA has published the voting decisions of the board members, with six having voted for the decision to hold rates, and three having voted against it.
“Reasonable people can differ in their interpretations of data,” Ms Bullock argued. “This demonstrates really good debate in the boardroom. We don’t think inflation, in a sustainable way, is that low.”
Treasurer Jim Chalmers said mortgage holders were surprised by the RBA board’s decision. Picture: News Corp Australia
Ms Bullock said the difference between the two camps was a slightly softer reading of the data from those who wanted to cut rates.
“Also, a little bit more concern of the downside risks, particularly on the international side, from those who wanted to ease,” she added.
Where does this leave Aussie homeowners with mortgages, however?
“There are only five weeks until the next meeting, after which June quarter Consumer Price Index will be known,” Ms Bullock said. “We must keep inflation down while trying to maintain a healthy job market.”
Board blasted over communications
With almost all economists unanimously expecting a cut yesterday, questions have been raised about the central bank’s communications with the public.
This is the third rates decision from the RBA since the introduction of a new ‘dual board’ structure. Picture: Getty
Homeowners are expected to have a reasonable understanding for the board’s movements on rates in advance of decisions, based on how the bank positions itself in public-facing communication.
Despite this, Ms Bullock was quick to defend the bombshell hold.
“Even though markets were pricing in a cut, it was inappropriate for me or anyone in the Reserve Bank to go out and say ‘oh maybe not’ because the board hadn’t met and it hadn’t made a decision,” she said. “We can’t do that.”
Ms Bullock was also quick to defend questioning on whether the bank had betrayed homeowners.
“I don’t think we’re betraying anyone, betrayal would be to let inflation get out of hand.”
Tariff concerns
Recent White House confirmation of the delay of higher US tariffs has also bought the RBA slightly more time for rate cut decision making.
While mortgage borrowers will have to wait longer for the opportunity to cut back on repayments, Australian Industry Group chief executive Innes Willox says there is reason to be sympathetic with the bank’s positioning.
“Global economic factors are highly uncertain, particularly as the world waits for a landing point to emerge regarding tariffs,” he said. “The RBA has understandably decided to keep its powder dry as economic conditions evolve.”
Ray White Group chief economist Nerida Conisbee agreed the extension of Trump’s tariff pause gives the RBA “more time to assess global trade dynamics”.
Any major adjustments to monetary policy on the back of the US could leave households in an even more unstable position.
“While Australia’s economic fundamentals remain sound with unemployment steady at 4.1% and GDP growth of 0.2% in the March quarter, the RBA appears content to monitor how the extended pause affects global trade patterns before providing additional stimulus,” Ms Conisbee said.
US president Donald Trump first announced tariffs in April which were later postponed after causing a global market crash. Picture: News Corp Australia
A 10% base tariff on most countries with additional duties up to 50% is scheduled to be implemented on 1 August.
Ms Bullock said it was clear there would be an impact on Australia. Even a minor impact has the ability to shock inflation and once again expose mortgage holders.
“That’s partly what’s driving some of the deflationary impact in our forecast,” Ms Bullock said. “Anything could happen, and we are alert to that.”
Describing markets as “remarkably sanguine” in the face of expected tariffs, Ms Bullock said she was confident the impact on Australia would be minimal.
“We not as directly linked to the US, our fortunes are much more closely linked to China,” she said.
Taking advantage of the pause is well timed, Ms Conisbee added.
“With further cuts still expected this year, today’s hold may prove to be a strategic pause that allows for more measured policy responses as global trade uncertainties evolve.”
With geopolitics so strongly driving economics, Deloitte Access Economics head Pradeep Philip said it remains to be seen whether the RBA’s ‘wait-and-see-approach’ on inflation will be the right one.
“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,” he explained.
“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 article first appeared on Mortgage Choice and has been republished with permission.
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