How Central Banks Make Decisions
Portfolio Manager Jing Jia explains the process of central banks' interest rate decisions and how it evolves over time.
The decision-making process has a significant impact on the market, with bond yields, currency rates, share markets, and mortgage rates reacting immediately.
Despite the complexity of the market's reaction, the framework behind the decisions is relatively straightforward.
A recent example is the 30 September 2025 RBA meeting, where the central bank held rates steady as expected, but the bond markets reacted negatively due to a shift in the RBA's tone on inflation risk.
This shift led to a reduction in consensus expectation for interest rate cuts from two to one, and the timing of the next cut was also delayed.
The framework can help explain why bond markets reacted negatively despite the central bank holding rates steady.
Author's summary: Central banks' decisions are based on a straightforward framework.