Australia's central bank surprised markets on Tuesday by keeping its cash rate unchanged at 3.85%, defying widespread expectations of a rate cut.
The bank noted that most board members preferred to wait for clearer signs that inflation is easing before making a move.
In response, the Australian Dollar jumped 0.8% to $0.6545, while three-year bond futures dropped 13 ticks to 96.58.
Market reaction now suggests there's about an 85% chance of a rate cut to 3.60% at the next meeting on 12th August, with expectations for the rate floor shifting to 3.10% instead of the previously anticipated 2.85%, Reuters reports.
Concluding its two-day policy meeting, the Reserve Bank of Australia (RBA) signalled continued caution over inflation, revealing a rare split vote: six board members supported holding rates steady, while three pushed for a cut.
Markets had largely anticipated a rate reduction to 3.60%, especially as core inflation had eased to the midpoint of the RBA’s 2–3% target and consumer spending was softer than expected.
“The Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5% on a sustainable basis,” according to a board statement.
“It noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia.”
On Monday, President Donald Trump escalated his global trade war, announcing that increased US tariffs on key partners like Japan and South Korea would take effect on 1st August, though he hinted at possible room for further negotiations.
Meanwhile, Australian Treasurer Jim Chalmers commented on the RBA’s unexpected decision to keep rates unchanged, saying it was not the outcome millions of Australians had hoped for, nor what markets had anticipated.
“We have made substantial and sustained progress on inflation which is why interest rates have already been cut twice in five months this year,” Chalmers said.
Harry Murphy Cruise, head of economic research at Oxford Economics Australia, argued that given the global uncertainty and encouraging inflation data, a rate cut would have been justified at Tuesday’s meeting.
“Yes, the domestic economy has pockets of strength and unemployment is low, but we’d rather see momentum build in the economy ahead of a potential storm than risk being caught flat-footed if conditions sour,” he said.
Furthermore, in its statement, the RBA noted that although monthly CPI figures “suggest that June quarter inflation is likely to be broadly in line with the forecast, they were, at the margin, slightly stronger than expected.”