July 9, 2025

 

(THE INTEREST RATE CUT RATED A 95 PER CENT CERTAINTY THAT DIDN’T HAPPEN)

 

July 9, 2025

 

Hello everyone

 

Aussies blindsided by the RBA

The Reserve Bank of Australia (RBA) kept rates on hold at 3.85 per cent on Tuesday.  An interest rate cut was widely forecast by both the financial markets and economists. 

Looks like everyone forgot about the 5 per cent chance that the RBA wouldn’t shift.  And who can blame them.  The near certainty that the RBA would move on Tuesday shocked everyone when they left rates unchanged.

The RBA governor said it was all “about timing rather than direction”, so now we have an 85 per cent chance of a rate cut next month, as markets are not entirely convinced and are not certain.

Probably the main outcome of the RBA meeting on Tuesday was the erosion of trust in the RBA due to its large swings in tone between meetings, despite efforts to rebuild trust in the past six months.

Following the May monetary policy meeting, the RBA adopted quite a dovish tone for the first time in a long time.  And they even acknowledged then that an outsized 50 basis point cut had even been considered at that meeting following Trump’s “Liberation Day” tariff announcements.

A significant shift in attitude was noted at this meeting on Tuesday, which marked a stark contrast to past meetings over much of the previous year.

A rate cut this week was widely expected because the monthly inflation indicator for May had been softer than expected, both in headline and underlying terms.  Underlying inflation, which is the measure that the RBA is focussed on, dropped to just 2.4%, the lowest annual pace in more than three years. 

Of course, the inflation numbers do not show the full picture.  But what is confusing to everyone is the fact that the overwhelming evidence shows that inflation is not deviating from the RBA’s expectations, so why would they postpone a cut?

 

 

What models are they looking at and just how good are they anyway?

Following the Tuesday meeting the RBA said that inflation data for May was “at the margin, slightly stronger than expected”, and they will only feel confident once the June quarter data is out in black and white. 

The RBA also suggested that “private domestic demand appears to have been recovering gradually.”

I think that many people would disagree with this assertion, as it seems to me that consumer demand and confidence have been quite weak, despite tax cuts, lower inflation and two rate cuts, and the fact that the US tariff policy will most probably continue to undermine business.  I heard recently that one in ten hospitality businesses have closed over the past twelve months due to the harsh economic climate in Australia.   

I doubt any level of certainty will be built into the RBA acting at the next meeting.

 

 

Cheers

Jacquie