BREAKING: Reserve Bank Holds Cash Rate at 3.85% in Split Decision as Board Awaits Inflation Clarity
Six members voted to maintain rates while three dissented as June quarter data came in slightly stronger than forecast
The Reserve Bank of Australia kept the cash rate unchanged at 3.85 percent today following a divided vote among board members, as policymakers seek more evidence that inflation remains on track to reach the central bank's target range sustainably.
In an unprecedented move, the RBA revealed the voting breakdown for the first time, showing six members supported maintaining the current rate while three opposed the decision during today's monetary policy meeting.
The central bank said inflation has continued to moderate since peaking in 2022, with underlying inflation reaching 2.9 percent in the March quarter. However, recent monthly Consumer Price Index data suggested June quarter inflation would be "slightly stronger than expected," prompting caution among board members.
"With the cash rate 50 basis points lower than five months ago and wider economic conditions evolving broadly as expected, the Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 percent on a sustainable basis," the RBA statement said.
The decision comes as uncertainty persists over US trade policy and its potential global economic impacts, while domestic indicators show mixed signals about the economy's direction.
Inflation Progress Continues Amid Data Concerns
The RBA noted that headline inflation reached the midpoint of the 2-3 percent target range in the March quarter, partly influenced by temporary cost-of-living relief measures. Trimmed mean inflation, which excludes volatile items, stood at 2.9 percent.
The central bank's May baseline forecast anticipated underlying inflation would continue moderating toward the midpoint of the target range, assuming a gradual easing path for interest rates.
"While recent monthly CPI Indicator data suggest that June quarter inflation is likely to be broadly in line with the forecast, they were, at the margin, slightly stronger than expected," the statement said.
Higher interest rates have been working to bring aggregate demand and supply closer to balance since inflation peaked in 2022, according to the RBA's assessment.
Global Uncertainty Weighs on Outlook
International developments, particularly around US trade policy, continue to create uncertainty for Australian economic conditions. While financial markets have rebounded with expectations that extreme policy outcomes will be avoided, the RBA warned of ongoing risks.
"While the final scope of US tariffs and policy responses in other countries remains unknown, financial market prices have rebounded with an expectation that the most extreme outcomes are likely to be avoided," the statement noted.
Trade policy developments are nevertheless expected to adversely affect global economic activity, with risks that households and businesses may delay spending pending greater clarity on the economic outlook.
The central bank emphasized that uncertainty in the world economy remains elevated, creating challenges for domestic policy decisions.
Domestic Economy Shows Mixed Signals
Private domestic demand appears to be recovering gradually, with real household incomes improving and some easing in measures of financial stress. The March quarter national accounts confirmed domestic demand has been picking up over the past six months.
However, businesses across various sectors continue reporting difficulties passing cost increases to final prices due to weak demand conditions.
"Businesses in some sectors continue to report that weakness in demand makes it difficult to pass on cost increases to final prices," the RBA said.
The central bank's May forecasts anticipated continued increases in household consumption as real incomes rise, though risks exist that the recovery may prove slower than expected.
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Labour Market Remains Tight Despite Economic Softening
Labour market conditions continue to show tightness across multiple indicators, presenting a complex picture for monetary policy makers.
"Various indicators suggest that labour market conditions remain tight. Measures of labour underutilisation are at relatively low rates and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers," the statement said.
Wages growth has softened from peak levels when adjusted for quarterly volatility, but productivity growth has not improved, keeping unit labour costs elevated.
The combination of tight labour conditions and weak productivity outcomes creates uncertainty about how firms will respond to the balance between demand and supply for goods and services.
Policy Stance Reflects Balanced Risk Assessment
The RBA board continues to view inflation risks as more balanced while acknowledging the labour market's continued strength. This assessment underpins the cautious approach toward further policy changes.
"The Board continues to judge that the risks to inflation have become more balanced and the labour market remains strong. Nevertheless it remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and supply," the statement said.
The central bank emphasized it is well-positioned to respond decisively to international developments if they materially impact Australian economic activity and inflation.
Multiple Economic Scenarios Under Consideration
The RBA outlined several potential economic scenarios that could influence future policy decisions. A slower-than-expected pickup in domestic demand could result in continued subdued aggregate demand growth and sharper labour market deterioration.
Alternatively, labour market outcomes may prove stronger than anticipated, given signals from various leading indicators.
"There is a risk that the pick-up is a little slower than earlier expected, which could result in continued subdued growth in aggregate demand and a sharper deterioration in the labour market than currently expected," the statement noted.
Uncertainties also exist regarding the timing of recent monetary policy easing effects and how firms will adjust pricing decisions and wages in response to market conditions.
Board Commits to Data-Driven Approach
The monetary policy board emphasized its commitment to monitoring economic data and evolving risk assessments to guide future decisions.
"The Board will be attentive to the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market," the statement said.
Key areas of focus include global economic and financial market developments, domestic demand trends, and inflation and labour market outlooks.
Mandate Priorities Remain Clear
The RBA reaffirmed its commitment to achieving both price stability and full employment under its dual mandate.
"The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome," the statement concluded.
This commitment suggests the central bank will adjust policy settings as needed to meet both inflation targets and employment objectives.
Historical Context of Split Decisions
The decision to publish voting breakdowns represents a significant transparency initiative for the RBA. The 6-3 split reveals meaningful disagreement among board members about the appropriate policy stance.
Such divisions typically reflect differing views about the balance of economic risks and the appropriate timing for policy adjustments. The disclosure of voting patterns aligns with practices at other major central banks that publish dissenting views.
The revelation of disagreement among board members may signal evolving views about the economic outlook and appropriate policy responses as conditions change.
Market and Economic Implications
The unchanged cash rate maintains the current monetary policy stance while the split vote suggests potential for future policy adjustments as economic conditions evolve.
With the cash rate currently 50 basis points below levels from five months ago, the cumulative easing reflects the board's response to changing economic conditions while maintaining caution about future moves.
The emphasis on waiting for additional information suggests upcoming economic data releases will be crucial for determining the central bank's next policy steps.
The RBA's approach reflects the complex challenge of balancing inflation control with economic growth support amid significant domestic and international uncertainties.
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