Missing piece of the rate cut puzzle revealed following shock RBA decision

Crucial data being released next week will be the decider on whether the Reserve Bank cuts interest rates in August.

Following its shock decision to keep interest rates on hold at 3.85% in July, market commentators have been awaiting the minutes from the Reserve Bank of Australia’s (RBA) latest meeting for any clues around its decision. 

The minutes, released on Tuesday, said a cut to the cash rate would have been “inconsistent” with the RBA’s “cautious and gradual” easing strategy. 

The board also confirmed some of the recent inflation data it had seen had been slightly stronger than expected, resulting in the surprise decision not to cut rates.

It noted quarterly inflation data, set for release next week, would be key in making a decision to lower the cash rate.

The fallout from the 12-day Iran-Israel war and the US Congress’ unveiling and subsequent legislating of the One Big Beautiful Bill Act were also identified as reasons for the decision to hold.

Focus on inflation

Rather than take a risk on a third cut in four meetings, the board said it was focused on achieving its inflation and full employment objectives.

“The focus at this meeting was on the appropriate timing and extent of further easing, against the backdrop of heightened uncertainty,” it stated.

“The outlook was for underlying inflation to decline further in year-ended terms, warranting some additional reduction in interest rates over time.”

Inflation concerns appear at the crux of the board’s decision, with the minutes giving ample space to recent discussion over its views on the reliability of the Australian Bureau of Statistics’ data.

Governor Michele Bullock has previously pointed out the inconsistency of the monthly Consumer Price Index (CPI) updates, confirming the board focusses instead on quarterly updates.

The board noted the sharp declines in the monthly indicators for headline and trimmed-mean inflation in the lead up to its July meeting were “likely to have overstated the easing in underlying inflation momentum”.

It noted the CPI monthly data suggested underlying inflation was not aligned with the bank’s forecasting in May.

“It was difficult to determine with precision how far interest rates needed to fall before monetary policy was no longer restrictive,” the board added.

The minutes build on Ms Bullock’s comments immediately after the board’s decision in which she said the RBA was waiting on the next release of quarterly data from the ABS at the end of July before changing its policy approach.

Communication concerns

The RBA board has been on the receiving end of criticism about its communications with the public in recent months and the differences between its messaging and its actions.

In an unusual move, the board appeared to directly address this in its most recent meeting, confirming its approach was to “wait a little longer” before adjusting monetary policy again.

“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,” it said.

Despite the latest hold, the board projected a positive tone on future easing. The meeting minutes show it expects a slight uptick in headline inflation at the end of the year but further underlying inflation easing through into 2026.

Economists stumped

Economists and markets had priced in a near certainty for a cut in the lead up to the board’s July meeting, leaving little room for expectations of a slowdown in the RBA’s cutting cycle.

The board’s statement showed members had noted that a 0.25% cut to the cash rate was expected by most market economists.

“There had been previous occasions when market participants had been very confident about the outcome of a monetary policy decision, but the Reserve Bank board had decided on an alternative course,” it stated.

Three of the board’s nine members voted to lower the cash rate in July – a view the minutes state was more aligned to placing weight on downside risks to the economics outlook.

Slowing growth overseas and sluggish growth for the Australian economy are good reasons for this, though the board noted recent international tensions had had little to no impact domestically.

“Forward-looking consumer and business surveys had not fallen sharply in the immediate aftermath of the initial US tariff announcements, as they had in other developed economies,” the board stated. “And it was too soon to see much effect in the data on domestic economic activity.”

While this is in line with the board’s thinking in May, it noted in its July minutes that the future state of US policies is “unpredictable” and that geopolitical tensions “remained acute”.

The US Congress’ One Big Beautiful Bill Act of 2025 – a range of planned tax and spending policies for president Donald Trump’s second term – were introduced on the day of the board’s May rates decision. It subsequently passed through the Senate on 4 Jul – too close to the board’s meeting for full consideration but close enough to entice concern and give more weight to the case to hold rates.

The board said there had been little immediate reaction to the bill in yields, but confirmed prospects of the bill on its fast path to legislation “had contributed to growing concerns over sizeable fiscal deficits in future”.

Middle East tensions

The 12-day Iran-Israel war in the weeks immediately before the board’s meeting were also identified as a point of concern and added weight to its cautious approach to cutting.

“While the conflict in the Middle East had de-escalated significantly and the overall effects on the global economy had been limited, members noted that more persistent shocks to energy prices, should they occur, would affect the prospects for global growth and inflation,” the statement read.

The board will make its next decision on rates at the conclusion of its 11-12 August meeting.

This article first appeared on Mortgage Choice and has been republished with permission.

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