Mortgage brokers should remain alert to shifting interest rate expectations, with the Reserve Bank’s July minutes revealing a split board and a cautious tone despite improving global market conditions.
“Two divergent views on the appropriate path for the cash rate got a good airing in the July Monetary Policy Board minutes,” said Westpac Group chief economist Luci Ellis (pictured) in her post-minutes analysis.
While the global trade outlook remained uncertain, Ellis noted the RBA placed “more weight than before on its base case that US tariffs would land at lower rates than originally announced,” though risks of market complacency lingered.
“There was no real economic benefit to waiting five more weeks,” Ellis said. But she believes the board used the delay to preserve institutional independence: “Cutting in July could have looked like the market pricing forced the cut.”
The board remains reluctant to declare victory on inflation, despite headline indicators easing.
“The minutes highlighted alternative monthly calculations that ‘had not eased as much as the monthly trimmed-mean indicator recently,’” Ellis wrote.
With full monthly CPI expected later this year, RBA used the current data to flag the risk of an upside surprise.
“The RBA staff are alive to the need for a handover from non-market to market-sector employment growth,” Ellis said, pointing to the recent easing in the NAB quarterly survey and June labour force data.
“Together... this lends further weight to the idea that the labour market is again becoming less tight.”
Westpac’s economics team added that June jobs data further supported a rate cut: employment was flat across May and June, unemployment rose to 4.3%, youth unemployment jumped 0.9 percentage points to 10.4%, and hours worked fell by 1%.
The RBA revisited its views on productivity and neutral interest rates, emphasising short-term distortions and broader uncertainty about the long-run outlook.
“What the minutes do not make clear,” Ellis said, “is whether the assumed pick-up in productivity growth in the forecasts is simply the unwind of the shorter-term factors... or relies on AI boosting productivity similarly to the effect computers had in the 1990s.”
On monetary stance, the RBA described its position as “modestly restrictive” and reaffirmed that inflation would remain at target even with rate cuts.
“This admonition is in line with our earlier warning not to give that shift much credence,” Ellis said.
With risks finely balanced, the July minutes revealed internal disagreement on the cash rate decision. Some members preferred to hold for confirmation that inflation was on track, while others felt the evidence already justified a cut.
“The minority of members who voted for a cut highlighted the risks that the growth and inflation forecasts might prove too optimistic,” Ellis wrote.
She also cautioned against clinging to well-worn phrases like “the narrow path” or “cautious and predictable.”
“A good-sounding phrase... can shape thinking even when circumstances change,” she said.
Ellis reflected on the psychology behind the decision: “I underestimated how much we humans can get stuck in a narrative... 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.”
Ellis also warned about rising geopolitical risks, noting that the US administration’s tariff escalation is “about showing the world who is boss.” While inflation effects have been muted, Westpac said blow-ups are still possible depending on how other governments respond.
The RBA’s hesitancy and the growing divergence in board opinions signal an uncertain policy outlook heading into the second half of 2025. For mortgage brokers, that means continued borrower caution, unpredictable funding costs, and heightened sensitivity to CPI and labour market releases.
“Uncertainty about where neutral is will become a bigger issue for the MPB with time,” Ellis said.
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