To The Moon

In a surprising move during its July monetary policy meeting held this afternoon, the Reserve Bank of Australia (RBA) decided to keep the official cash rate unchanged at 3.85%, defying market expectations. This unexpected decision led to a sharp reaction in financial markets—AUD/USD surged by 40 pips, the ASX 200 $S&P/ASX 200(XJO.AU)$ dropped approximately 0.3%, and the 3-year government bond yield climbed 5 basis points to 3.42%. The decision was passed by a 6:3 vote, and for the first time, the RBA disclosed anonymized voting records, revealing clear divisions within the policy board.

Source: RBA

AUD/USD, TradingView

Inflation Trends and Policy Considerations

According to the latest economic data, inflation in Australia has continued to moderate. Headline inflation for the March quarter fell to 2.4%, below the mid-point of the RBA’s 2–3% target range. The May CPI eased further to 2.1%, while core inflation also slowed to 2.4%—both at their lowest levels in recent quarters. These benign inflation numbers led markets to price in over a 90% chance of a 25 basis point rate cut.

However, despite these encouraging figures, the RBA noted that some recent economic indicators have been slightly stronger than expected. Of particular concern is the persistently high unit labor cost, reflecting weak productivity growth—a structural issue. In its statement, the RBA emphasized the need for more time to assess the impact of the two recent rate cuts, to ensure inflation remains sustainably anchored near the 2.5% target.

Source: RBA

Uncertainty in the Economic Outlook

The uncertain global economic outlook played a significant role in the RBA’s decision to pause. U.S. President Donald Trump’s recently announced tariff plans have raised concerns across markets. Although Australia is not directly impacted, the broader uncertainty in global trade could prompt businesses to delay investment. Domestically, while household real incomes have shown signs of recovery, consumer sentiment remains fragile, and several sectors are facing weak demand. Despite a tight labor market, stagnant productivity growth presents a structural challenge to policymakers.

Divergence in Global Monetary Policy

The RBA’s decision to hold rates steady comes at a time when global central banks are diverging in their policy stances. While the U.S. Federal Reserve continues to hold rates unchanged, the European Central Bank, Bank of Canada, and Bank of England have already initiated monetary easing. These differing paths reflect varying domestic conditions. For Australia, the balancing act is more delicate—navigating global trade headwinds while managing domestic inflation and growth dynamics. This rate pause may also signal the RBA’s intent to observe the next moves by global peers, particularly the Fed.

Outlook for Future Policy

The RBA reaffirmed that its primary objectives remain price stability and full employment. The board will closely monitor developments in the global economy, domestic demand, and labor market conditions and remains ready to adjust policy settings should new risks emerge. Analysts suggest that while markets had expected two more rate cuts this year, the sticky nature of inflation and persistent external uncertainty could lead the RBA to extend its wait-and-see approach. The timing of the next policy shift will largely depend on forthcoming economic data.

In the post-meeting press conference, RBA Governor Michele Bullock stated that the current stance remains "moderately restrictive," though she admitted it is difficult to precisely quantify the degree. She remarked: “We assess the stance is still restrictive—but how 'moderately' so? That’s difficult to judge.” This uncertainty, she explained, is why the central bank is adopting a gradual approach. Bullock emphasized her open yet cautious posture on future moves, refusing to predict a terminal rate but affirming the overall policy direction is leaning toward easing—albeit at a cautious pace. This signals that in a volatile global trade environment, the RBA is prioritizing policy flexibility.

Invesight Viewpoint

In today’s complex economic landscape, the RBA’s cautious stance reflects the challenges facing monetary policy. On one hand, it must ensure inflation continues to ease, while on the other, it must guard against risks stemming from global economic uncertainty. The art of policy balancing is more important now than ever. Over the coming months, key variables—such as inflation trends, labor market conditions, developments in global trade, and the Federal Reserve’s policy direction—will all be critical in shaping the RBA’s next steps.