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Australia: Policy Rate Held At 3.85% (Consensus 3.6%) in Jul-25

• The RBA surprised markets by maintaining the cash rate at 3.85%, rejecting consensus expectations for a cut and citing the need for further confirmation that inflation is sustainably on track to the 2.5% midpoint.
• The decision reflects persistent uncertainty in the global economic environment and a domestic outlook characterised by robust labour market conditions but only gradual recovery in household demand, with risks on both sides of the inflation outlook.
• The Board’s split vote and explicit data-dependent stance signal that future interest rate decisions will be highly sensitive to forthcoming inflation and labour market data, as well as evolving international developments.

Inconsistently Dovish Pricing

• Dovish market fears from April have unwound for the Fed, yet deepened for the BoE, despite broadly resilient data and cautious guidance from policymakers reluctant to cut.
• Equity prices have relied on this resilience to recover, yet expectations for extended rate-cutting cycles imply it breaks. Payrolls only forced half of the gap to close.
• We expect ongoing resilience to keep rolling market pricing for rate cuts later, with the unnecessary easing ultimately never being delivered by the BoE, Fed, or ECB.

By Philip Rush

HEM: Rolling Resilience

• Activity remains resilient, and labour markets are tight
• Underlying price and wage inflation mostly track >2%
• Doves assume this regime breaks, but it isn’t happening
• Cuts can keep rolling later and may never materialise
• Rate hikes are more historically usual after pausing

HEW: Payrolls Waking Up Rates Pricing

• Dovish rate pricing had been ignoring resilient data until US payrolls delivered a rude awakening. We believe rates remain too dovish relative to reality and equity prices.
• BoE surveys also revealed resilience in defiance of dovish pricing, while the rise in EA unemployment merely matched ECB forecasts and was heavily reliant on Italy.
• Next week’s deadline for US tariffs is the main risk event, as not all countries will likely get an extension. Monetary policy decisions come from the RBA, RBNZ, BNM, and BOK.

By Philip Rush