RBA holds rates at 3.85%, defies market expectations

The Reserve Bank of Australia (RBA) has decided to keep its benchmark interest rate unchanged at 3.85%, contrary to market expectations for a 25 basis point cut to 3.60%. The decision was made by majority vote, with six members in favor and three against.

The central bank noted that inflation has eased significantly from its 2022 peak, supported by tighter monetary policy that has helped bring demand and supply closer to balance. However, it acknowledged that recent monthly CPI indicators were slightly above expectations, although still broadly in line with forecasts for Q2.

"With the cash rate 50 basis points lower than five months ago and overall economic conditions evolving as anticipated, the Board judged it appropriate to wait for further data to confirm that inflation is on track to sustainably return to 2.5%," the post-meeting statement reads.

The RBA also highlighted persistent tightness in the labor market. Underutilization rates remain low, and business surveys indicate that labor availability continues to constrain some employers. Although wage growth has moderated from its peak, productivity growth remains weak and unit labor costs are still high.

The board emphasized that inflation risks are now more balanced and the labor market remains resilient. However, it maintained a cautious stance given ongoing uncertainties on both the demand and supply sides. "Monetary policy is well-positioned to respond decisively to international developments should they have material implications for activity and inflation in Australia," the statement added.