With markets pricing in around a 90 per cent chance of a rate cut heading into Tuesday’s meeting – and economists broadly aligned – the decision marked a significant reset in the RBA’s monetary messaging.
The board said it would wait for “a little more information” to confirm inflation is on a sustainable path back to the midpoint of its 2-3 per cent target – which governor Michele Bullock repeated at her post-meeting press conference.
“I’m also really conscious that we don’t want to end up having to fight inflation again. We want to make sure we’ve nailed it,” Bullock said.
Similarly, the board in the post-meeting statement said: “Inflation has continued to moderate ... With the cash rate 50 basis points lower than five months ago and wider economic conditions evolving broadly as expected, the board judged that it could wait.”
The trimmed mean inflation rate fell to 2.9 per cent in the March quarter, inside the target range for the first time since late 2021. But the board noted that monthly CPI data had been “slightly stronger than expected” and reiterated caution amid lingering domestic and global uncertainties.
Tuesday’s hold follows two rate cuts earlier in 2025, with the RBA also citing continued strength in the labour market and a pick-up in domestic demand as reasons to remain on hold.
"Various indicators suggest that labour market conditions remain tight," the board said. "There are uncertainties about the outlook for domestic economic activity and inflation stemming from both domestic and international developments."
It also signalled readiness to act if global volatility re-emerges, noting that monetary policy is “well placed to respond decisively” if international developments materially affect activity or inflation.
Bullock also revealed that global developments dominated much of the discussion during the central bank’s two-day board meeting.
While she said the consensus was that the risk of a severe downside scenario linked to global trade tensions had eased since May, she cautioned that “this is a very fluid situation”, and the bank would continue to monitor data closely.
Ultimately, the governor assured that the board is not keeping interest rates high “just in case”. Instead, she said: “We are reacting to domestic inflation data and the employment data, and trying to find our way through it.
“The direction is, provided inflation keeps coming in as expected, we can expect interest rates to decline.”
But Bullock signalled the next major data points – including June quarter inflation and July labour force numbers – will now take on heightened importance as the board considers when to resume its easing cycle.
Decision not unanimous
Addressing suggestions of a possible communication breakdown between the bank and market pundits – given broad expectations of a 25 basis point cut – Bullock pushed back, saying the disconnect stemmed from the market's overreliance on monthly CPI figures, which she described as “a little too volatile and not quite representative of what’s really going on with inflation”.
“We’re a little cautious about that … The quarterly CPI is the comprehensive thing that gives us the best read,” she said.
“There was a couple of components in that monthly CPI that suggested to us that quarterly CPI might be a little bit higher than what we had been forecasting in May. Now that doesn’t necessarily mean that we’re off track, but we just want the data to confirm that we are pretty much on track.”
The rate decision, however, was not unanimous, with a rare disclosure revealing a 6-3 majority vote – an unprecedented move by the RBA that adds new transparency to its policy process.
Elaborating on this, Bullock said the key divide between the two camps was that six members were "a little bit more concerned about the downside risks, particularly on the international side", while the remaining three read the data "slightly softer".
"The difference was not about direction ... it was more about timing," she said.
Reactions mixed
Vanguard senior economist Dr Grant Feng said the decision to pause was well justified given the broader economic backdrop.
“The pathway to further rate cuts by the RBA this year will depend on greater evidence that demand is weakening and more progress on disinflation,” Feng said.
“Although Australia’s quarterly trimmed mean CPI has fallen back to the target bank for the first time since Q4 2021, it is just below the upper limit and will likely stay in the top half for at least in the near term.”
While the global environment has evolved rapidly since April, Feng said the recent US–China trade truce has eased growth concerns and diminished downside risks.
“Both domestic and global conditions warrant a cautious policy stance,” he added. “Vanguard continues to believe the disinflation process in Australia will be slow. Consequently, the RBA is likely to adopt a cautious stance towards rate cuts, with the pace of easing expected to be gradual throughout the year.”
For his part, Krishna Bhimavarapu, APAC economist at State Street Investment Management, characterised the RBA’s decision not to cut as “a little perplexing”.
“The Aussie consumer is vulnerable to high rates given their high household debt and its associated servicing costs ... For this reason, we still see the cash rate reaching 3.10 per cent by December, with the possibility of a larger cut in August now in play,” Bhimavarapu said.
AMP's Shane Oliver said that despite the decision, the overall tone of the RBA's commentary continues to lean dovish. He highlighted the bank's assessment that the risk to the inflation outlook has become more balanced, along with its caution regarding the risks surrounding the impact of US trade policy and a slower pick up in household and business spending.
"While we were wrong in our expectations for a cut in July and the RBA is proving to be even more gradual than we had come to expect, we continue to see further rate cuts as we see economic growth picking up more slowly than the RBA is forecasting, underlying inflation is likely to be confirmed around the 2.5 per cent target and monetary policy remains tight," the chief economist said.
"So, despite the surprise decision to leave rates on hold this month we continue to see the RBA taking the cash rate back to around neutral with more cuts to 2.85 per cent. It’s just that its now going to take a bit longer and so we are forecasting 0.25 per cent rate cuts in August, November, February and May," he added.
Oliver also warned that the by delaying the rate cut, the RBA potentially risks inflation slipping below target, which would ultimately necessitate more aggressive cuts down the track.
