RBA surprise: Divided board holds cash rate at 3.85%

The Reserve Bank's Monetary Policy Board has defied expectations by leaving the official cash rate on hold at 3.85% at its July meeting which concluded this afternoon.

Leading up to the meeting, the expectation from markets and many experts had been that the Board would bring interest rates down to 3.60% with a 25-basis-point cut.

This was based on the idea that the central bank would be influenced by the lower-than-anticipated inflation figures that came out of the Australian Bureau of Statistics' monthly Consumer Price Index (CPI) result for May, as well as relatively weak spending data.

That was not the case though. In a statement put out at the conclusion of today's meeting, the Board confirmed that it would continue to wait for more data.

"With the cash rate 50 basis points lower than five months ago and wider economic conditions evolving broadly as expected, the Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5% on a sustainable basis."

Interestingly, the decision was not unanimous. The post-meeting statement noted that the six Board members were in favour of the decision while three were against.

Cuts already fueling property market

While the RBA Board may have stayed their hand today, previous cuts in February and May appear to already be having an impact on the Australian property market.

After a period of decline over the turn of the year, home values have now risen for five consecutive months, according to research from Cotality.

The median national dwelling value increased by 0.6% in June alone thanks to price growth in most cities and regional parts of the country.

Tim Lawless, Cotality's research director, notes that the rebound has coincided with the recent decline in interest rates.

"The first rate cut in February was a clear turning point for housing value trends. An additional cut in May, and growing certainty of more cuts later in the year have further fuelled positive housing sentiment, pushing values higher."

Mathew Tiller, head of research at LJ Hooker, says that even though rates remained steady today, the previous cuts are likely to continue to have an impact on demand and prices.

"Listing volumes have remained tight, as many sellers continue to hold back, creating a supply and demand imbalance that is putting upward pressure on prices."

Is an August rate cut on the table?

The dust may have barely settled on today's decision, but attention will already be turning towards the Reserve Bank Board's next meeting on August 11 and 12.

Given that plenty of experts were anticipating cash rate cuts in both July and August in the lead up to this afternoon's Board meeting, it's safe to assume that today's rate hold will firm up the idea of an August cut even more in some minds.

Of course, a lot could happen in the intervening weeks.

For one, the Reserve Bank Board will have more economic data to digest, including the full June quarter CPI result (published on July 30) as well as fresh employment and spending figures.

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