The Reserve Bank of Australia has lowered interest rates by 25 basis points, resulting in a cash rate of 3.60%, the lowest in two years, as the economy starts to recover.
The move, made in unanimity, marked a departure from the July decision, when policymakers unexpectedly held steady at 3.85%, with some dissent among board members.
Inflation Nears Target
Recent data suggests that headline inflation has softened to 2.1%, while core inflation rests at 2.7%, placing both indicators within, or approaching, the RBA’s 2–3% target band. These figures have granted the central bank enough confidence to ease policy cautiously. Much of the recent disinflation has been the result of declining goods prices and softening energy prices. Nevertheless, inflation in the services sector remains quite sticky, suggesting that underlying pressures have not yet dissipated.
Early Cracks in the Labour Market
Concurrently, the labour market has shown early signs of softening: unemployment rose from 4.1% to 4.3%, signalling a loosening in what has been a tightly held labour market. Employers are noting less pressure to recruit, and vacancies have started declining in many sectors. This reflects a general decline in labour demand as companies adapt to tougher economic circumstances and higher operating expenses.
Growth Outlook Cut Amid Productivity Concerns
Despite these developments, the RBA tempered optimism by downgrading its growth expectations, citing persistently weak productivity as a drag on longer‑term momentum. Trend productivity projections were lowered, suggesting a time of poor living standards and sluggish income growth.
The GDP growth forecasts for 2025 were lowered from 2.1% to 1.7%, which supported the idea that Australia’s recovery trajectory is now more muted than expected. Weaker-than-anticipated household spending and a slowdown in key export markets, which have weighed on overall economic momentum, also influenced this downgrade.
Meanwhile, despite the cautious tone, the RBA’s forecasts for inflation and unemployment remain largely intact. Headline Consumer Price Index (CPI) is expected to peak at 3.1% by mid‑2026, before easing to 2.5% by end‑2027. Underlying inflation is expected to hold steady at 2.6% through this period, while unemployment is projected to sit at 4.3% through 2027.
Markets Price In More Cuts
Financial markets, buoyed by incremental optimism, are now pricing in the possibility of another 25‑basis‑point cut by November. Yet expectations for a move in September remain tentative.
Analysts—including those at Oxford Economics—suggest additional easing may become necessary should inflation continue to trend downward and joblessness drift higher.
The Global Environment Offers Limited Support
The RBA’s decision unfolded against a broader, modestly supportive backdrop: a recently extended 90‑day tariff truce between the U.S. and China offers some respite from rising trade tensions. Nevertheless, global risks remain prevalent, and the RBA’s readiness to act remains contingent on incoming data.
What Lower Rates Mean for Households and Businesses
For homeowners, the rate cut translates into real relief, particularly for variable‑rate borrowers, who can look forward to smaller monthly payments. But for business, and especially for those afflicted with productivity ills, the respite may be short-lived unless structural reforms are undertaken to underpin innovation and production. The RBA’s growth downgrade is a reminder that stimulus cannot substitute for deep-seated economic strength.
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RBA Treads Cautiously Toward Easier Policy
In sum, the RBA has embraced a measured step towards monetary easing, reducing the cash rate for the first time in 2025. While the progress in easing inflation and the slight softening of employment provide justification, the Board’s underlying message is clear: policy remains restrictive, and further cuts are not guaranteed.
Persistent productivity headwinds and economic uncertainty, both domestic and global, underscore the central bank’s adroit balancing act: offering much‑needed relief while ensuring restraint remains the default until the outlook clears.
