Australia Holds Interest Rate Steady at 3.85% Amid Inflation Uncertainty

In a surprise move, the Reserve Bank of Australia (RBA) kept its policy interest rate unchanged at 3.85% on Tuesday, despite widespread expectations of a 25-basis-point cut. The central bank stated it needed more time and data to confirm that inflation is sustainably tracking towards its target of 2.5%. Economists polled by Reuters had anticipated a reduction in rates, but the RBA pointed to slightly stronger-than-expected consumer price data as a reason for caution.

Recent inflation figures showed signs of easing, with May’s inflation at 2.1%—the lowest since October 2024—and first-quarter inflation at 2.4%, a four-year low. Despite this progress, the central bank noted that the most recent monthly Consumer Price Index (CPI) indicators were marginally above expectations. This nuanced trend in inflation data influenced the bank’s decision to wait before making any policy shifts.

Australian Treasurer Jim Chalmers responded to the decision by acknowledging public disappointment, noting it was “not the result millions of Australians were hoping for.” He emphasized, however, that significant progress had been made in fighting inflation and highlighted government measures to reduce cost-of-living pressures.

Market reactions were mixed following the announcement. The S&P/ASX 200 fell 0.24%, while the Australian dollar gained 0.79% against the U.S. dollar. This reflects ongoing economic uncertainty, especially as Australia faces a slowdown in growth due to falling public expenditure, weakening exports, and reduced consumer demand. GDP growth for Q1 2025 came in at 1.3%, missing expectations of 1.5%.

Analysts at Oxford Economics believe the case for a rate cut remains strong. Harry Murphy Cruise, head of economic research, predicts the next cut could come as early as August. By then, the RBA will have access to fresh quarterly inflation data and a clearer view of the impact of new tariffs. Cruise warned that waiting too long could leave the economy vulnerable if global conditions deteriorate.

Source: CNBC