Preview of RBA Board Meeting Decision, Friday, 4th July, 2025

FundMonitors.com

July 2025

Summary 

In the lead-up to the Reserve Bank of Australia's (RBA) July policy meeting, Chris Gosselin, CEO of FundMonitors.com, hosted Nicholas Chaplin from Seed Funds Management, and Renny Ellis from Arculus Funds Management to assess the likelihood and implications of a rate cut. Despite soft inflation data for May (2.1%), both urged caution, highlighting the strength of the labour market, rebounding housing prices, and the broader economic stability. 

While markets are pricing in a cut, Chaplin and Ellis questioned the need for further easing given the current conditions, pointing out that GDP softness-not inflation-may be the real concern. They also compared the RBA's stance with the U.S. Federal Reserve, concluding that domestic factors should drive policy, not international pressure. 

Conclusion: 

Both Nicholas Chaplin and Renny Ellis advocate a "wait and see" approach. Despite market expectations, they caution that economic fundamentals do not yet warrant aggressive easing, especially with employment strong and inflation stable. Growth concerns exist, but the RBA has room to observe data and remain flexible in its response. 

Key Points: 

1. Inflation and RBA Mandate 

• May's headline inflation came in at 2.1%, within the RBA's 2-3% target range. 

• Trimmed mean inflation-the RBA's preferred measure-was 2.4%, suggesting inflation is still hovering near target but not significantly below it. 

• Both Chaplin and Ellis noted that inflation alone doesn't justify a rate cut at this stage. 
   

2. Labor Market Strength 

• Unemployment remains just above 4%, indicating a tight labor market. 

• The RBA's full-employment mandate has largely been met, removing urgency for monetary easing. 
   

3. Economic Growth Concerns 

• March quarter GDP growth was 0.2%, or 1.3% annually, which is weak historically but not unprecedented. 

• Chaplin emphasized low GDP growth as a more valid justification for a possible rate cut, rather than inflation. 
   

4. Housing and Asset Markets 

• Housing prices are rising nationally, and the share market is at record highs. 

• Tight credit spreads and a steep yield curve suggest market confidence and financial system stability. 
   

5. Electricity Subsidies and Policy Interpretation 

• Inflation has been distorted by state and federal electricity subsidies. 

• Ellis argued that the RBA should "look through" these temporary distortions, as previously stated by Governor Bullock. 
   

6. RBA vs. Federal Reserve (Fed) 

• Powell's Fed is holding off on rate cuts amid rising inflation and trade policy disruptions in the U.S. 

• The panel agreed that the RBA should focus on domestic conditions, not mirror Fed policy moves. 
   

7. Market Expectations 

• Markets are currently pricing in a 100% probability of a July cut and 90% for August. 

• If the RBA holds, expectations may shift to only one or two cuts for the rest of 2025. 

• A hold could lead to a stronger Australian dollar, flattening of the yield curve, and slight changes in short-term rates. 
   

8. Recommendations from the Panel 

• Nicholas Chaplin: Would hold rates, but if a cut is made, it should be a single 35-basis-point move to avoid signaling multiple future cuts. 

• Renny Ellis: Would also hold, citing the need to see post-subsidy inflation impacts and overall economic data play out before acting. 

Full Transcript: 

Chris Gosselin: 
Welcome. I'm Chris Gosselin, CEO of FundMonitors.com.  

The RBA board meets next Monday, and following two days of deliberations, they're expected to announce their decision at 2:30 PM on Tuesday afternoon. 

To preview that decision, I'm joined today by two experienced fund managers in the fixed income space: Nicholas Chaplin, Director and Portfolio Manager at Seed Funds Management; and Renny Ellis, Director and Head of Portfolio Management at Arculus Funds Management. 

Gentlemen, welcome. 

We're here to unpack what the RBA might decide, with markets almost unanimously pricing in a rate cut from the current 3.85%. Monthly inflation data for May was surprisingly soft at just 2.1%-well within the target range-fueling expectations of a cut. But with unemployment just over 4% and ongoing global uncertainty, is now the right time to ease? Let's dive in. 

Nick, let's start with you. Inflation came in at 2.1%, well below expectations. Do you think that gives the RBA enough justification to cut rates now? 

Nicholas Chaplin: 

I think Michele Bullock addressed this quite clearly on May 20 in her post-meeting media discussion. She stated that the "narrow path" narrative on inflation should be removed from their commentary-they've essentially achieved that goal. Yet interestingly, that didn't stop some banks from forecasting up to three more rate cuts this year. 

The rate cut in May seemed to acknowledge that CPI had reached the mid-to-low twos, which was justified when the 2.1% figure came out. But Bullock also highlighted strong labor market conditions, rising household expenditure, and a rebounding housing market. We're seeing price rises in housing across the country, which will need to be factored in-especially if CBA, NAB, or Westpac are right about a terminal rate around 3% or even 2.85%, and getting there quickly. 

However, the bigger driver for me is the weak GDP figure-just 0.2% in the March quarter and 1.3% annually. That's low by historical standards, though not unprecedented for Australia. That's where my concern lies and why I think a cut in July is justifiable. 

While many predict a 100% chance of a cut in July and 90% for August, I hold a slightly different view, which I'll explain further. But yes, in my opinion, the justification for a cut is there-more due to growth concerns than inflation. 

Chris Gosselin: 
Renny, unemployment is still low, and the RBA has said they want inflation sustainably back within the target band. Would you be more cautious? 

Renny Ellis: 
Yes, I would. First, to clarify, the RBA focuses on the trimmed mean inflation on a quarterly basis. That figure was around 2.4% in May-so not quite as low as the headline 2.1%. We're near their 2.5% target under the new mandate, but not below it. 

I don't see pressing reasons to cut in July. That said, I suspect they probably will-bank bill swap rates are already trading around 3.6%. I agree with much of what Nick said, but I'd add that the RBA has indicated they'd look through the distortions caused by federal and state electricity subsidies, which have significantly impacted inflation data since March last year. 

Asset prices are strong, the share market is at a record high, credit margins are tight, and the yield curve is steep-all signs of a strong economy. Given unemployment is low, I don't see a need to cut. If they do, I doubt they'll follow with another. 

Chris Gosselin: 
So, is there a risk of overstimulating an already resilient economy? 

Renny Ellis: 
Absolutely. And there's a bit of a safety net here. If the RBA cuts and it's the wrong move, they can act more aggressively later. But I don't think we're at that point now. 

Nicholas Chaplin: 
Adding to that, the RBA's mandate includes full employment and financial stability. We're already operating beyond full employment, and the financial system is stable. There's no urgency to cut, unlike during downturns when unemployment is rising. They can afford to wait. 

Renny Ellis: 
Another factor is the strong Australian dollar, which is disinflationary, especially for goods. It has played a major role in keeping us out of recession over decades. Also, Michele Bullock made five key points on May 20 that were quite bullish: 

• Private domestic demand is recovering, 

• Real household incomes have picked up, 

• Financial stress is easing, 

• Employment is growing, and 

• The labor market remains tight. 

The main downside risk she mentioned was geopolitical uncertainty. 

Nicholas Chaplin: 
That's why I was surprised to see forecasts of three more cuts this year. As you said, Renny, it's not all about the CPI outcome. Unemployment isn't at 8%. If you walk through Sydney or Melbourne on a Friday night, restaurants are full. That's not the 1981 or 1991 recession picture. Bullock has time and flexibility. 

Renny Ellis: 
Exactly. The pressure from markets and media, and even households under financial stress, is real-but doesn't align with what we're seeing on the ground. Stability in unemployment supports the view that the RBA can wait. Historically, a 50-basis-point rise in unemployment precedes recessions, and we're far from that. 

Chris Gosselin: 
What about the Fed? Jerome Powell is facing intense pressure from the White House, yet the Fed appears in no rush to cut. Should the RBA consider that in its decision-making? 

Nicholas Chaplin: 
The RBA should stay focused on the Australian economy. The U.S. has more economic momentum and rebound capacity. Australia needs to focus more on our trading partners. Arguments that we should follow the Fed are weak. 

Renny Ellis: 
I agree. The RBA's mandate doesn't require them to follow the U.S. The U.S. economy, like ours, is at full employment-but their inflation is higher. The Fed follows core PCE, which rose from 2.6% to 2.7% in May and is forecast to hit 3.4% by September. They also face inflationary pressure from tariffs and a weakening U.S. dollar. Their reasons to hold rates differ substantially from ours. 

Chris Gosselin: 
Let's talk market implications. If the RBA cuts, how might bond and equity markets respond? And what if they surprise and hold? 

Nicholas Chaplin: 
Markets are pricing in a cut-100% for July, 90% for August. If they don't move next week, it will make August nearly a certainty for a 25-basis-point cut. If they hold, we might see some adjustment in the 90-day bill rate, though it's already around 3.6%. 

Renny Ellis: 
If there's no cut, we could see the 90-day bank bill swap rate tick back up to around 3.8%, where it was before the May inflation data. Market expectations would likely shift from two or three cuts down to one or two for the rest of the year. 

The yield curve could flatten slightly, particularly in the 5- to 10-year segment. We'd also see a spike in the Australian dollar, which is disinflationary. I don't expect much impact on equity markets from the decision. 

Chris Gosselin: 
Gentlemen, a final question for each of you: if you were in Michele Bullock's chair next Tuesday, would you cut or hold? 

Nicholas Chaplin: 
I would hold. The arguments we've discussed support that. If a cut does happen, I'd recommend one 35-basis-point move over the next three months-not two 25-point cuts. That would simplify expectations and allow for a clearer pause. My primary interest would be monitoring how it impacts GDP in the medium term. Inflation seems under control, though we'll need to watch the Aussie dollar-if it climbs into the 70s, we'll have to reassess. 

Renny Ellis: 
I'd also hold. We should wait to see the full effect of the electricity subsidy roll-off on inflation data. Michele Bullock said last November they'd look through these subsidies. This is the time to follow through on that. 

But keep in mind, she's only one member of the board. The final decision is collective. 

Nicholas Chaplin: 
It's the same with Jerome Powell-people think it's all up to him, but the FOMC has 12 other members. It's not just his or Michele's call, but they're certainly the ones under pressure. 

Chris Gosselin: 
Rightly or wrongly, she's the one in the spotlight-just as Powell is in the U.S., with perhaps a target on his back instead of just pressure. 

Let's wrap it up there. The RBA's new two-day meeting format begins on Monday, with the decision due at 2:30 PM on Tuesday. We'll reconvene then to discuss the outcome. 

Nicholas Chaplin from Seed Funds Management, Renny Ellis from Arculus Funds Management-thank you both for your time. 

Watch the full video here.