Did the RBA misfire with its decision to hold rates this month?

Australia Broadcast Center

30-07-2025

What do you get when inflation falls at the same time unemployment is rising?
Rate cuts, that's what.
In fact, the interest rate cut we should have seen a few weeks ago has now become a certainty for the next Reserve Bank of Australia meeting next month.
At the shock post-meeting press conference, RBA governor Michele Bullock made it clear the board was awaiting confirmation that inflation was in decline, reiterating that it didn't want to act prematurely, only to discover that it had to resume the inflation fight later on.
Those fears were allayed on Wednesday when the June quarter inflation data confirmed consumer price rises decelerated to 2.7 per cent during the three-month period, well down from the 2.9 per cent rise in the March quarter.
That's for underlying inflation, the measure that strips out influences like government support measures such as rent assistance and power bill subsidies.
On a headline basis, inflation has dropped to just 2.1 per cent, at the very bottom end of the RBA's comfort zone between 2 and 3 per cent.
For most of this year, the newly introduced monthly inflation figures have been pointing towards a slowdown in the pace of consumer price rises.
But the RBA remains anchored to the traditional quarterly numbers that, to be fair, have a far more comprehensive data set upon which to make interest rate decisions.
There's a chorus of "I told you so" that would answer in the affirmative.
But given there are only a few weeks between the July and August meetings, it shouldn't make that much difference, apart from the bruised egos of those who confidently, but wrongly, predicted a cut this month, your correspondent included.
One of those was Luci Ellis, until recently a formidable part of the RBA brains trust, before last year joining Westpac as chief economist.
"The five-week difference isn't really such a big deal. So, we wouldn't regard them as being particularly behind the eight ball with this decision, assuming they do actually go forward with a rate cut next month," she told Kirstin Aitken on The Business.
Holding rates again, however, could create problems.
"Because (monetary) policy operates on the economy with a lag, you actually kind of need to already be there, so there's not really a good argument for a continued hold."
This month's decision to keep interest rates unchanged wrong-footed financial markets, which again are pricing in an almost certainty that rates will be cut next month.
Markets and economists were convinced that the most recent GDP figures, delivered before this month's meeting and which highlighted a barely expanding economy, in conjunction with declining monthly inflation figures, were a compelling enough reason for a cut.
The data since has only added weight to that argument.
Unemployment has jumped from 4.1 per cent, where it has been steady for almost a year and a half, to 4.3 per cent as the labour market has softened.
The number of people applying for jobs hit a new record last month, indicating a loosening in the job market.
Even the handful who didn't believe there was a compelling reason for a rate cut this month were swayed by the latest inflation data,
Betashares' David Bassanese said the broad-based easing in goods, services, and housing-related inflation set the scene for an August rate cut.
But he defended the RBA's decision to hold fast this month, as the less reliable monthly figures indicated underlying inflation would fall at a much faster clip than occurred.
"It turns out the governor was right to be cautious with annual trimmed mean inflation in the quarterly CPI report of 2.7 per cent, notably higher than what the May monthly report had suggested."
The focus now is on how much further rates will be cut after this month.
"My base case remains that the RBA will cut rates in August and then again in November and February," he said.
Luci Ellis is also tipping an August and November cut. But she also thinks the RBA may be undershooting on where it believes interest rates will settle, given it believes inflation will fall further than the RBA currently is forecasting.
"We think there are two more rate cuts after that, assuming our forecasts for inflation are what turns out to be the actual," she said.
But she's confident about her forecasts.
"Their favoured measure of underlying inflation is flat as a pancake at 2.6 per cent a year for, you know, the entire period they were forecasting.
"And we just think it's going to land somewhere in the low twos through the next year."
A few weeks back, the RBA governor assured the nation that rate cuts were a matter of when rather than if.
That's rapidly shifting to a question of how many.