Homeowners and markets were left disappointed on Tuesday after the Reserve Bank of Australia (RBA) opted to keep the cash rate unchanged at 3.85%, defying widespread expectations of a cut.
The decision went against the forecasts of all four major banks and several prominent economists who anticipated a 25 basis point reduction. The ASX responded with a 21-point dip following the announcement.
“In a surprise decision to consensus forecasts, the RBA left the cash rate unchanged at 3.85%. The accompanying statement highlighted the strong labour market but a more balanced view on inflation, but the 6-3 decision stemmed largely from continued uncertainty on the outlook for demand and supply – particularly a pick-up in the former – and the medium-term trend for inflation towards target," Dwyfor Evans, Head of APAC Macro Strategy at State Street Markets, said. "Our PriceStats online inflation series for Australia has alluded to higher than target inflation for some time, but the renewed vigour in the housing markets has given the RBA additional reasons to pause for now. A hiatus in the easing cycle, pending further clarity on medium-term inflation trends and a short-term boon for the AUD.”
Krishna Bhimavarapu, APAC Economist at State Street Investment Management, noted: “The RBA’s decision to not cut is a little perplexing, as we have been tracking weak momentum in the economy, which was hinted in the Q1 GDP data recently. The Aussie consumer is vulnerable to high rates given their high household debt and its associated servicing costs (see chart below); we suspect if this has been a dynamic that has been holding back consumption. For this reason, we still see the cash rate reaching 3.10% by December, with the possibility of a larger cut in August now in play.”
Ivan Colhoun, Chief Economist at CreditorWatch, explained the rationale behind the surprise move.
“This was considered the second most likely outcome of today’s Board meeting but was predicted by only a very small minority of economists, while markets were of course almost fully priced for a 25bps cut. As such, it’s a big surprise. But it likely means a delay of only one further month until the next interest rate cut.
"The decision to not follow up May’s rate cut with another move in July likely reflects the RBA Monetary Policy Board’s desire to continue to receive additional certainty on the inflation front from the full June quarter CPI to be released in late July, together with a full forecast update from the Bank’s staff in August. By that time, the Board will have received additional information on tariff developments with a lot of information to be released this week. Australia’s continuing very low unemployment rate, and the fact that the next Board meeting is only one month away, meant the Board did not have to make a quick follow up rate cut at this meeting.”