MNI RBA WATCH: Board Shocks With Hold As Trade Fears Ease

Concerns over stubborn domestic inflation led the Reserve Bank of Australia board to keep the cash rate at 3.85% on Tuesday, in a six-three split decision that defied fully-priced-in market expectations for a 25-basis-point cut as global trade fears eased.

Governor Michele Bullock was unapologetic following the call, noting the Reserve had limited ability to influence market pricing ahead of the decision, largely due to the new board voting structure that makes rate moves less predictable. “I can't go out and suggest to the market that the decision might be x if the decision hasn't been made, and the decision is made by a board of nine people, all independent,” she said. “We can't send Reserve Bank people out there to tell the market to expect something different, because we don't know what the board necessarily is going to decide.” (See MNI: RBA Rate Cut Expectations Overblown- Ex-Officials)

Markets had priced in over a 95% chance of a cut, with the vast majority of external economists also forecasting a move lower. The board eased 25bp in May, adding to the quarter-point move it made in February, but, as MNI reported on July 2, officials have since become less concerned by the risk of a global slowdown prompted by U.S. trade policy. (See MNI POLICY: RBA Trade Concerns Abate, Focus On Domestic Market)

Following the decision, traders pared back their end-of-year rate cut expectations to 62bp of cumulative easing from 75bp prior to the meeting. (See chart)

DOMESTIC FOCUS

A renewed focus on domestic conditions drove the decision, with Bullock stressing the importance of reviewing Q2 inflation data, and reiterating the RBA’s long-standing concerns over the monthly CPI indicator, which it sees as highly volatile. 

While May’s indicator showed trimmed-mean inflation falling, Bullock said prices for housing construction and durable goods remained concerning. The labour market also remained tight, she added.

However, Bullock pushed back on suggestions that the Bank was “keeping its powder dry” in anticipation of global economic turmoil, saying the board agreed on the direction of rates but differed on timing. “What we're focusing on is the domestic economy and where we think the domestic economy is headed,” she argued, pointing to May’s forecasts that included three very different tariff-driven scenarios.

She noted the shift from May’s discussion of a possible 50bp move to Tuesday’s hold reflected how quickly the international backdrop had changed. While global trade conditions remain significantly worse than before April despite recent stabilisation, Bullock noted Australia is less exposed than other countries due to its stronger ties to China rather than the U.S.

VOTING RECORDS

While Tuesday’s decision also marked the first time the board published unattributed votes, Bullock stressed there were no plans to publish attributable votes in future. Australia’s system works best with anonymous voting, which encourages frank debate and shields board members from lobbying, she added. “It would mean that people could speak freely," she continued. "It means that we can have this very good discussion and quite active discussion with people knowing that, yes, the votes will be recorded, but they individually can speak freely.”