Reserve Bank of Australia Reveals Why It Held Rates in July

The central bank’s minutes outline its rationale for holding the cash rates at 3.85 percent.

Michele Bullock, Governor of the Reserve Bank of Australia, speaks at the IMF/World Bank Group Spring Meetings at the IMF headquarters in Washington, DC, on April 23, 2025. Oliver Contreras/AFP via Getty Images

The Reserve Bank of Australia (RBA)’s Monetary Policy Committee has released its meeting minutes, revealing the reasons for holding the Official Cash Rate (OCR) at 3.85 percent in July.

The decision came down to a six-to-three vote, the central bank said, with the majority opting to wait for more data on inflation and global economic developments before easing policy further.

Economists and financial markets were surprised by the move, which broke with expectations and reignited debate over the RBA’s monetary strategy.

The RBA noted that recent improvements in global markets seemed to reflect expectations that the worst effects of U.S. tariffs would not happen.

However, the board questioned if investors were being too complacent.

Among the data the RBA was watching closely was the June quarter Consumer Price Index (CPI), which will help determine whether inflation was returning sustainably to the bank’s 2.5 percent target.

According to the minutes, the majority of the board members felt that lowering the cash rate a third time within the space of four meetings would be “unlikely to be consistent with the strategy of easing monetary policy in a cautious and gradual manner to achieve the board’s inflation and full employment objectives.”

“Monthly indicators of inflation had been marginally higher than were consistent with the staff’s forecast,” the minutes said.

“Growth in private demand in the March quarter had been a little stronger than expected, and conditions in the labour market had so far not eased as anticipated.”

Productivity a Problem

One longer-term factor influencing the bank’s outlook was the stagnation in productivity growth.

“The slowing over recent decades reflected structural headwinds, though other factors, including a decline in productivity in the mining sector and an expansion in the size of the non-market sector, had also weighed on productivity growth in the preceding year,” the minutes said.

Despite no measurable rise in productivity since 2016, the staff’s forecast continued to assume an eventual pick up.

“Members noted that this assumption materially influences the medium-term outlook for growth in the economy’s supply capacity, incomes, and demand.”

Still, the board was optimistic, noting that the likelihood of the “most severe scenarios for the world economy” had been reduced since their May meeting. This allowed members to place more weight on baseline forecasts and less on worst-case scenarios.

Dissenting Views

However, a minority of members argued the evidence was already strong enough to warrant a rate cut.

They said inflation appeared to be returning to the midpoint of the target range, “if not lower,” and warned of the time lag between policy changes and their impact on the economy.

“This implied less need to wait before easing policy further, which was a relevant consideration given the lags in the effect of monetary policy on economic activity and inflation,” they argued.

These members also pointed to weak domestic GDP growth and a forecast global slowdown, warning this could cause underlying inflation to fall faster than expected.

A senior economist from the Commonwealth Bank of Australia (CBA), Belinda Allen, said the RBA expects inflation to ease gradually, but noted a risk that inflation could rise slightly higher than expected.

“Even so, the RBA is still communicating an easing bias. This makes an August rate cut our base case,” she said.

ANZ Head of Australian Economics Adam Boyton also expects the RBA to cut rates in the coming months.

“Our cash rate view has not been changed by these minutes,” Boyton said. “We expect 25 basis point cuts in both August and November 2025.”

Meanwhile, the ANZ-Roy Morgan Australian Consumer Confidence held steady at 86.3 points last week. While confidence in the overall economy rose, confidence in personal financial conditions fell.