Australia’s central bank surprised investors and economists by keeping interest rates unchanged on Tuesday and signaled a wait-and-see approach on policy as US tariff plans stoke uncertainty across the world.
The Reserve Bank held its key rate at 3.85%, a decision that only five of 32 economists had predicted, while the rest in the survey, along with most traders, expected another quarter-point cut. The RBA has eased twice in its current cycle and economists have been debating how much further easing is likely given the tightness of the labor market and poor productivity growth.
Governor Michele Bullock faced tough questions at a briefing in Sydney, including whether the RBA had “betrayed” households expecting a rate cut. She said the decision Tuesday was about the timing of a move, rather than the direction.
“I understand that people had expected there might be a rate cut today, my message to them is, provided that we are on top of inflation, then yes, there is an easing cycle coming,” she said.
Six of nine members of the monetary policy board voted in favor of the decision that sent the Australian dollar higher. Policy-sensitive three-year government bond yields rose the most since January, extending an earlier gain. While traders still priced the central bank will cut three more time in the current cycle, the third was pushed into the first quarter of 2026 from being priced for year-end before the decision.
“The board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5% on a sustainable basis,” the monetary policy board said in a statement. “It noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia.”
The RBA’s pause comes as global central banks are splitting on policy. The Federal Reserve has stood pat through the first half of 2025, while the European Central Bank, Bank of Canada and the Bank of England have all eased in recent months.
“It’s a shock for the market that July hasn’t been delivered, but key language around inflation suggests they’re just kicking the can down the road to August which is pretty much a ‘lock’ now to the market,” said Robert Thompson, a strategist at Royal Bank of Canada in Sydney. “So that’s tempering the hit and ensuring terminal rate pricing doesn’t kick up too much.”
Since the RBA’s May 19-20 meeting, data have shown monthly inflation slowed to near the bottom of the bank’s 2-3% band, household spending is tepid and pessimists are still dominant in consumer sentiment surveys. At the same time, weak productivity growth means unit labor costs are likely to remain elevated, raising risks of renewed inflation pressures. Government spending also remains strong, underscoring the board’s cautious approach to the outlook.
“We share the central bank’s concerns about the health of Australia’s consumers,” said James McIntyre who covers Australia at Bloomberg Economics and correctly predicted today’s decision. “Without household spending, the resilience of the labor market will be significantly tested.”
President Donald Trump’s tariff plans have meantime triggered fears about the prospects for global growth.
The US president on Monday unveiled the first in a wave of letters that threaten to impose higher tariff rates on key trading partners, including levies of 25% on goods from Japan and South Korea, and signed an executive order holding off the new duties until Aug. 1.
“The likelihood of a severe downside scenario associated with a trade war, which we set out in our May statement, that likelihood has abated,” Bullock said. “But this is a very fluid situation and we will continue to watch the data here and overseas very closely to see how they play out.”
Australia received the lowest level tariff of 10%, while also being impacted by sectoral duties on steel and aluminum.
According to modeling by Australia’s Productivity Commission, many of the proposed US tariff changes could have a small, positive effect on the local economy.
Cheaper imports from the rest of the world, and an outflow of productive capital from the US and highly tariffed economies, would stimulate Australian production, the commission said. Its modeling shows the US “Liberation Day” tariffs and sectoral imposts on aluminum, steel and cars and parts could lead to an increase in Australian real GDP of 0.37%.
One of the biggest concerns for Australia is the impact of US tariffs on the economy of its biggest trading partner, China. Australia’s goods exports to China were worth 6.6% of nominal gross domestic product in 2024.
RBA Deputy Governor Andrew Hauser will on Wednesday morning deliver a speech on ‘What Has Australian Macroeconomic Thought Achieved in the Past Century – and Where Can it Contribute in the Next?’
With assistance from Shinjini Datta, Brett Miller and Matthew Burgess.
This article was generated from an automated news agency feed without modifications to text.
