The Reserve Bank of Australia rejects a third consecutive rate cut with a 6:3 split, needing more inflation data to cautiously ease policy

According to the latest published minutes, the Reserve Bank of Australia (RBA) believes that a third rate cut within four meetings does not align with its cautious and gradual easing strategy, which is the reason for the market's shock at its decision to hold rates steady this month. The minutes from the policy meeting on July 7-8 show that the majority of the nine-member committee of the RBA determined that the 3.85% interest rate remains in a moderately tight range, but it is difficult to ascertain how much room there is for further cuts before rates turn neutral. The minutes state, "Therefore, the members believe that a cautious rate cut may be a prudent move as the required degree of policy tightening decreases." Three members advocating for a rate cut argued that there is already ample evidence indicating that inflation is consistently returning to target levels, and there is no need to wait longer to further ease policy. The RBA's decision to maintain rates unchanged with a rare 6:3 split surprised the market, as the majority of the committee members preferred to wait for more information, including quarterly price data, to confirm that inflation is slowing. After the monthly inflation report showed that the core inflation indicator, excluding volatile items, reached a three-and-a-half-year low of 2.4% in May, traders had heavily bet on a rate cut. Economic growth in the first quarter was also nearly stagnant due to weak public demand. The RBA responded to market expectations by stating that there have been multiple instances in the past where the market was extremely confident about the outcomes of policy meetings, but the central bank ultimately took the opposite action. The bank indicated that several data indicators met or slightly exceeded expectations, proving that a slight wait is a wise move. The minutes pointed out that although economic growth was weak in the first quarter, the rebound in private demand was stronger than expected, and the labor market was not as loose as anticipated. The central bank believes that monthly inflation data may be quite volatile, and indicators such as housing suggest that inflation in the second quarter may be slightly higher than expected. Aside from the aforementioned factors, the probability of the global economy evolving into the most severe downturn scenario has decreased, although the future direction of U.S. trade policies remains difficult to predict. Following an unexpectedly weak employment report that raised concerns about cracks finally appearing in the resilient labor market, the market is currently betting on a roughly 91% probability that the RBA will ease again at its next meeting on August 12. The futures market expects rates to bottom out at around 3.1% by early next year