In a surprising decision, the Reserve Bank of Australia held the cash rate steady at 3.85% today, defying both market consensus and our expectations. The vote was split, with six of the nine monetary policy board members supporting the move.
While we had anticipated a rate cut given the recent softness in headline CPI inflation – now aligning more closely with the RBA’s 2-3% target -the central bank emphasised the need for further confirmation that “inflation remains on track to reach 2.5% on a sustainable basis.”
This outcome appears to reflect a matter of timing rather than a shift in policy direction. The RBA will closely monitor upcoming quarterly inflation and monthly employment data ahead of its next meeting in August. Governor Michele Bullock also flagged concerns around rising costs in home construction and durable goods, which will be key areas to watch in the next CPI release.
We continue to expect a moderation in trimmed CPI inflation in 2Q, keeping the door open for a potential rate cut next month. The RBA also placed particular emphasis on global developments and trade-related risks, and how these may affect domestic conditions – factors that should become clearer by the time of the next meeting.