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The RBA surprised markets by holding the cash rate at 3.85% despite expectations of another cut. Persistent inflation, rising housing prices, and mixed economic signals are keeping policymakers cautious as banks remain divided on the path of interest rates.
In a move that defied widespread expectations, the Reserve Bank of Australia (RBA), under Governor Michele Bullock, has opted to hold the official cash rate steady at 3.85% during its July meeting. This decision comes after two consecutive 25-basis-point cuts earlier this year, in February and May.
Major banks including ANZ, Commonwealth Bank, Westpac, and NAB had forecast another rate cut, with financial markets pricing in a 25bps reduction. However, the RBA’s decision appears to be driven by persistent inflationary pressures and the ongoing strain of rising living costs on household budgets.
Housing Market Heats Up
Australia’s housing market continues to surge, with national property prices reaching record highs after six straight months of growth through June. Analysts suggest that today’s rate hold is unlikely to dampen demand-side pressure, especially as buyers remain active and supply constraints persist.
Borrowers are now watching closely to see how lenders respond. While most banks passed on the May rate cut in full, a few held back, and today’s decision may prompt a mixed response in terms of variable rate adjustments.
Diverging Forecasts Among Banks
The Big Four banks remain divided on the trajectory of interest rates for the remainder of 2025. Westpac stands out as the most dovish, forecasting a cash rate bottoming out at 2.85% by year-end. Others anticipate a more moderate decline, with projections ranging between 3.1% and 3.35%.
Today’s unexpected rate hold may prompt a reassessment of these forecasts, as the RBA signals caution in the face of economic uncertainty.
Business Confidence on the Rise
In a positive development, the NAB Business Confidence Index rose to 5 in June, up from 2 in May, marking its highest level since January. This is the third consecutive month of improvement, bringing sentiment back in line with long-term averages.
The uplift has been driven by solid gains in sales, profitability, and employment across most sectors. Manufacturing and retail, which had faced setbacks in previous months, reported the strongest rebounds.
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Despite significant volatility in bond yields and equities over the past quarter, major markets ultimately finished flat. This persistent tension between resilient economic activity and rising discount rates underscores the complex environment facing diversified multi-asset portfolios.
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