RBA surprises the market with a hold

The Reserve Bank of Australia (RBA) held the cash rate steady at 3.85 per cent in its latest meeting, despite inflation continuing to moderate and the broader economy evolving largely in line with expectations. Its statement noted that headline inflation had fallen significantly from its peak while trending close to the midpoint of the RBA’s 2–3 per cent target range. Despite a stream of softer incoming data, the Board judged that with the cash rate already 50 basis points lower than five months ago and economic conditions broadly stable, there was scope to wait for further confirmation that inflation is sustainably on track to return to target. The RBA also noted ongoing uncertainty, both globally—amid shifting trade policies and financial market volatility—and domestically, where consumption recovery, labour market tightness, and productivity trends remain key variables. 

Leading up to today’s meeting, the May CPI confirmed that inflation had comfortably returned to target levels. Following that release, we expected the RBA to remain on hold and wait for the more comprehensive quarterly inflation data to support a potential cut in August, while recognising that the July meeting remained live. However, soon after, the retail sales print came in almost flat, well below expectations, highlighting persistently weak consumer demand and cautious household sentiment. With spending even on essentials like food declining, the case for an earlier rate cut in July strengthened meaningfully as the data pointed to a slower-than-expected recovery in household consumption.

The RBA’s recent communication has us somewhat questioning the consistency and clarity of its decision-making. At its previous meeting, the Board openly acknowledged that it had discussed the possibility of a 50 basis point cut—signalling a strong desire to support the economy more decisively. Yet at this meeting, despite further evidence of moderating inflation and ongoing economic softness, the RBA chose to hold rates steady, citing the need for “a little more information.” This signals a more reactive stance rather than a forward-looking approach. If the decision is purely about timing rather than direction, there is little justification for delaying a cut until August. As the Governor noted in her post-meeting remarks, should the upcoming quarterly inflation data surprise slightly to the upside, an August hold would have been far more understandable than the decision to hold today.

Furthermore, at the previous meeting, the Board had considered a 50 basis point cut. Since then, inflation has improved and economic conditions have remained broadly stable, yet the tone has shifted towards caution. While global sentiment at the time was weighed down by tariff 'word wars' between the US and China, uncertainty around the outlook remains largely unchanged. The risks today are no greater or lesser than they were then, making the decision to defer action harder to reconcile. This shift has further clouded the RBA’s policy signalling, leaving businesses, markets, and households with limited visibility on the direction of monetary policy.

Today's decision to hold is likely to dampen sentiment more than it supports it. The absence of further easing—despite earlier, more dovish discussions—risks entrenching cautious behaviour among businesses and consumers, potentially slowing the recovery.

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