Australia's central bank on Tuesday released minutes from its July 7-8 meeting, in which its "cautious" monetary policy board defied the expectations of traders and economists by leaving the cash rate unchanged at 3.85 per cent.
Despite inflation sitting within the RBA's 2-3 per cent target band, the economy was tracking stronger and the effects of Donald Trump's tariffs seemed less devastating than previously feared.
That gave the board scope to wait a little longer for more inflation and jobs data to make sure inflation really was on track to stay at 2.5 per cent sustainably, the minutes said.
"Lowering the cash rate a third time within the space of four meetings would be unlikely to be consistent with the strategy of easing monetary policy in a cautious and gradual manner," the board found.
In a 6-3 decision, the board judged it more prudent to leave rates on hold, concerned Australia's relatively tight labour market could push wage costs and prices higher.
The unemployment rate was 4.1 per cent in May, barely changed from a year earlier, while other indicators such as high job vacancies pointed to little movement in the near term, the board noted.
Australia's sluggish productivity growth rate weighed on the RBA's mind, as it contributed to faster growth in labour costs.
But the board's judgment the labour market remained tight was challenged on Thursday when the Australian Bureau of Statistics revealed the unemployment rate jumped to 4.3 per cent in June, taking the market and seemingly the RBA by surprise.
The data bolstered the case of a dissenting rump of three board members, who argued a rate cut was warranted because of downside risks "from a likely slowing in growth abroad and from the subdued pace of GDP growth in Australia".
"That in turn posed a risk that underlying inflation would moderate somewhat more rapidly than envisaged in the May projections," the minutes said.
Board members noted some jobs data implied "supply and demand in the labour market were closer to balance".
Interest rate markets have almost fully priced in a 25 basis point cut to the official cash rate at the August meeting and project it will fall to 3.2 per cent by the end of the year.
Each 25 basis point cut to the cash rate would shave about $90 off monthly repayments on a $600,000 mortgage.
June quarter consumer price index data, due to be released by the ABS on July 30, is "critical" to the RBA's next rates decision, CBA senior economist Belinda Allen said.
If underlying trimmed mean inflation prints at or below the RBA's 2.6 per cent forecast, a cut should be assured.
"A shift lower in the annual rate of trimmed mean inflation should be sufficient to see the cash rate lowered in August," Ms Allen said.
Another factor behind the board's decision not to cut was the bank's assessment that threats to the Australian economy from Donald Trump's tariffs had eased since the previous meeting in May.
In further signs Australia's idling economy may need a boost, government spending continues to drive the bulk of new project activity, accounting for 80 per cent of new investment in the June quarter, a Deloitte Access Economics report shows.
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