RBA holds steady as psychology and politics drive delay

The Reserve Bank’s surprise July hold and Trump’s fresh tariff escalation highlight the powerful role psychology and strategic signalling play in economic decisions, according to Westpac economists. 

No urgency to hold, but independence mattered 

Luci Ellis (pictured), Westpac Group’s chief economist, said the July decision to hold wasn’t about the data. 

“There was no real economic benefit to waiting five more weeks,” Ellis said. 

With employment softening and two-thirds of Q2 CPI data already available, Westpac had expected a 25bp cut. 

“The dirty little secret of monetary policy is that small differences in the level of interest rates or the timing of changes make essentially no difference for inflation outcomes,” Ellis said. 

Instead, the Westpac economist believes RBA used the delay to preserve institutional credibility. 

“The last thing a central bank wants is to be seen as not independent... Cutting in July could have looked like the market pricing forced the cut,” Ellis said. 

Human factors shaped the board’s decision 

Ellis reflected on the psychological dynamics behind the board’s call. 

“I underestimated how much we humans can get stuck in a narrative... I overweighted what I thought the RBA should do over what I suspected they would do,” she said. 

“I should have given some weight to the idea that the RBA insiders might use a relatively costless five-week wait to signal the institution’s independence.” 

Trump tariffs a test of global inflation tolerance 

The US administration’s re-escalation of tariffs is as much about power dynamics as policy. 

“These tariffs are about showing the world who is boss – or, as the White House put it, ‘Keeping America in the driver’s seat’,” Ellis said. 

While the inflation pass-through has been muted so far, Westpac warns blow-ups are still possible depending on how other governments react. 

Labour market weakens, rate cut still expected 

Westpac’s economics team added that Australia’s June jobs data strengthened the case for a cut. 

• Employment flat in May and June 
• Unemployment rose to 4.3% 
• Youth unemployment jumped 0.9ppt to 10.4% 
• Hours worked fell –1.0% 

Consumer sentiment also weakened post-decision. 

“The responses received prior to the [RBA] decision equated to a reading of 95.6, while those surveyed after came in at 92,” they said. 

Global update: inflation and trade 

• US: Producer price inflation slowed to 2.6% in June. CPI shows early signs of cost pass-through in goods. 
• China: Growth steady at 5.3%, but property investment and consumer spending remain weak. 
• UK: Inflation rose to 3.6%, but wage growth eased and unemployment ticked up, suggesting eventual BoE cuts. 

For more information, read the insights from Westpac IQ and Cliff’s Notes.