The RBA holds cash rate at 3.85% – but is a cut still coming?

Rob Hogg, CIO at SG Hiscock & Company, shares his take on why the RBA held the cash rate steady in July. He also discusses the shift in communication strategy and what it could mean for markets heading into August.

What happened yesterday? A recap of the RBA’s surprise hold

In a (non) announcement that surprised most market participants, including ourselves, the RBA’s Monetary Policy Board held the cash rate steady at 3.85%. Markets had largely priced in a cut to 3.60%.

This unexpected outcome caused market-traded interest rates to rise by around 0.10%. Shorter-dated securities (such as 2- and 3-year bonds), whose yields are most sensitive to changes in RBA cash rate expectations, recorded slightly higher yield moves.

In explaining their non-move, the RBA’s post-meeting statement emphasised that “it [the RBA’s Policy Board] could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis”.

Notably, the RBA released the voting pattern of board members, with six members voting for no change in rates, while three voted against (presumably in favour of a cut).

What it means for markets – and why volatility could rise

While the RBA Governor, Michele Bullock, reiterated several times in her post-meeting press conference that the RBA’s non-move was merely a question of timing (wanting to get more information before cutting rates) rather than direction (rates still expected to fall), a subtle (but significant) change in the RBA’s market signalling was revealed.

The Governor made clear that she and other RBA staff will likely not be as active in guiding market expectations as they may have been in the past, for the simple reason that the Policy Board is independent, and the meeting outcome, therefore, cannot be known in advance

No longer will well-placed “leaks” of implied RBA views feature at times when market pricing might be veering away from the RBA’s baseline view.

This change will probably lead to greater volatility in markets around interest rate decision days. That’s especially true when key data – inflation, employment, and spending – are not all clearly pointing in the same direction, as is currently the case.

However, this change would not be expected to change the direction of policy changes.

No cut yet – but is it just a matter of time? 

Following the RBA’s hold on the cash rate at the July meeting, market pricing has shifted. It now points to an expected cut at the August 11-12 meeting.

This seems consistent with the Governor’s comments about the timing of rate cuts. However, it will depend on a satisfactory June quarter Consumer Price Index, due on July 30.

Note: The Monetary Policy Board comprises nine members. Three are ex officio members: the Governor (Chair), the Deputy Governor (Deputy Chair) and the Secretary to the Treasury. Additionally, the Treasurer appoints the six non-executive members, drawn from business and academia.

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