How Central Banks Make Decisions
Portfolio Manager Jing Jia explains the process of central banks' interest rate decisions and how it can change over time.
The decision-making process has a significant impact on the market, with bond yields, currency rates, and share markets reacting immediately.
Despite the complexity of the market's reaction, the framework behind the decisions is surprisingly straightforward.
The framework can help explain why bond markets reacted negatively to the RBA's decision to hold rates steady on 30 September 2025.
This reaction was due to the RBA's shift in tone on inflation risk, which affected the market's expectations for interest rate cuts.
- Consensus expectation for interest rate cuts was reduced from two to one.
- Timing of the next cut was pushed back.
Author's summary: Central banks' decisions are based on a straightforward framework.
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