The Reserve Bank of Australia (RBA) surprised markets on July 8 by keeping its official cash rate at 3.85%, the lowest since May 2023. The decision defied analysts’ expectations of a likely 25 basis point cut this month, marking the bank’s first hold since beginning its easing cycle in February.

In its accompanying statement, the RBA said the decision to hold was driven by the need for “additional confirmation” that inflation is firmly tracking toward its 2.5% target on a sustainable basis. Policymakers also cited persistent “global economic volatility” and ongoing trade disruptions as reasons to maintain the current stance.

This cautious view follows May’s CPI data showing headline inflation at 2.1% year-on-year and core inflation at 2.4%, both within the RBA’s 2–3% target range. Despite these encouraging figures, policymakers elected to await further confirmation before resuming rate cuts.

RBA Governor Michele Bullock remarked, “We need to be confident that inflation is sustainably trending toward target,” echoing themes from the February rate cuts. Market expectations for a July reduction have dropped significantly, with sentiment tilting back toward August or later.

The decision had immediate market effects: the Australian dollar rose modestly, while the ASX 200 index slipped about 0.3%, reflecting investor recalibration .

Context & Outlook

• Inflation Within Target Range: May CPI data revealed headline inflation at 2.1% and core at 2.4%, aligning closely with the RBA’s 2–3% target band.

• Rate-cut expectations: Markets assigned nearly 100% odds to a July cut post-CPI, but July holds now see 92% odds for a cut in August.

• Global factors: Trade disruptions and geopolitical risks continue to influence economic sentiment, prompting central banks, including Australia’s, to proceed cautiously