- RBA holds rates at 3.85% despite market expectations for a cut
- Australian dollar rises, bond futures fall after RBA decision
- Markets now favour rates bottoming at 3.10%, rather than 2.85%
- Treasurer Chalmers notes disappointment, cites progress on inflation
SYDNEY, July 8 (Reuters) - Australia's central bank on Tuesday left its cash rate steady at 3.85%, a shock for markets that had confidently wagered on a cut, saying the majority of the board wanted to wait for more information to confirm inflation was slowing.
Traders were quick to send the Australian dollar racing up 0.8% to $0.6543, while three-year bond futures extended earlier losses and fell 10 ticks to 96.60.
The swift moves in markets imply around an 88% chance the cash rate would be cut to 3.60% at its Aug. 12 meeting, and now favours rates bottoming at 3.10% rather than 2.85%.
Wrapping up a two-day policy meeting, the Reserve Bank of Australia said it remained cautious about the inflation outlook, adding that six members had voted to hold rates steady while three voted against, a rare split decision for the board.
Markets had been almost fully priced for an easing to 3.60% this week given core inflation had slowed to the mid-point of the RBA's 2% to 3% target range and consumer spending was proving weaker than expected.
"The Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis," the 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."
RBA Governor Michele Bullock said the disagreement within the board was more about timing and that the bank remains on an easing path as long as the second quarter CPI comes in roughly in line with forecasts, stressing that monthly reports are somewhat volatile.
Speaking at a press conference following the policy decision, Bullock said if second quarter inflation "comes in as we think it will and continues to decline, then that validates our easing path. And that's what we were waiting for."
The central bank chief added that the worst outcome in U.S. tariffs has been averted but noted the levies are still higher than before.
On Monday, President Donald Trump ramped up his global trade war, telling trade partners like Japan and South Korea that higher U.S. tariffs would start on August 1, although there appeared to be opportunities for additional negotiations.
Australia Treasurer Jim Chalmers said the RBA decision to hold rates was not the result millions of Australians were hoping for or what the market was expecting.
"We suspect the downside risks that had focused the Board’s attention in May have receded significantly, which has subsequently been reflected in a different tone," said Adam Boyton, head of Australia economics at ANZ.
"Looking ahead we expect the RBA Board will decide to cut the cash rate in August... We also see an additional easing beyond August as more likely than not."
LESS DOVISH OUTLOOK?
The central bank cut interest rates in February and May, but the reductions did little to spur consumers into spending even as they lifted housing prices to record highs.
The stubbornly frugal consumer is a reason that the economy barely grew in the first quarter and a slew of soft retail sales reports suggest households are saving rather than spending past tax cuts.
A monthly inflation report had the closely-watched trimmed mean measure hitting 2.4% in May, a 3-1/2 year low and coming under the midpoint of the target band of 2-3%. That had prompted many economists to bring forward their rate cut call to July from August.
However, in its statement, the RBA said while the monthly CPI indicators "suggest that June quarter inflation is likely to be broadly in line with the forecast, they were, at the margin, slightly stronger than expected."
The labour market remained resilient, which argues against the RBA rushing into stimulatory policy settings. The unemployment rate has been hovering at 4.1% for over a year now.
"The upshot is that barring a major upside surprise in the Q2 inflation data, we still expect a cut at the Bank's next meeting in August," said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics.
"That said, the risks are now tilted towards less easing than the 100bps of cuts we're forecasting over the coming twelve months."
Reporting by Stella Qiu Editing by Shri Navaratnam
Source: Reuters