Reserve Bank of Australia: A rate cut now looks likely

At its July meeting, the Reserve Bank of Australia (RBA) surprised financial markets by leaving interest rates unchanged. This decision has turned attention to the next meeting of the Monetary Policy Board, scheduled for 11–12 August.

The pattern of inflation and monetary policy in Australia has broadly mirrored that in other advanced economies. Inflation pressures eased in the early months of the pandemic in 2020. From 2021, inflation began to rise, peaking in late 2022, and has since declined. In response, many central banks, including the RBA, have turned cautiously from tightening to easing their policy stance.

Australia’s headline consumer price index (CPI) inflation peaked at 7.8% year-over-year (YoY) in the last quarter of 2022 and fell to 2.1% YoY in the second quarter of 2025. More importantly, the quarterly trimmed mean inflation rate, the RBA’s preferred measure of price pressures, dropped from 6.8% YoY to 2.7% YoY over the same period. Monthly data tell a similar story, with annual inflation falling from 8.4% YoY in December 2022 to 1.9% YoY in June 2025.

During the pandemic, the RBA cut interest rates from 0.75% in early 2020 to 0.1%. As inflation rose, Australia’s central bank began a rate hiking cycle in May 2022, culminating in the cash rate reaching a peak of 4.35% in November 2023. It started easing policy again in February 2025, with the cash rate lowered to 3.85% by May.

Ahead of the July meeting, many observers had expected another rate cut. However, the second quarter CPI data were not yet available. The most recent inflation readings were from the first quarter of 2025, when headline inflation stood at 2.4% YoY and trimmed mean inflation at 2.9% YoY. While these values fell within the RBA’s 2-3% target range, they were arguably out of date.

Market expectations of a cut had been reinforced by the release of soft monthly inflation data for May. Nonetheless, the RBA chose to wait, citing the limited reliability of the monthly inflation data and its preference for waiting for the quarterly data to be released. It kept the cash rate at 3.85%.

The second quarter CPI release is now available. It shows inflation clearly within the target range, strengthening expectations that the RBA will lower the policy rate at its next meeting on 12 August.

The broader economic context also supports such a move. Growth has slowed, and signs of labour market softening have begun to appear. Quarterly real GDP rose by just 0.2% in the first quarter of 2025 and has averaged only 0.25% since the final quarter of 2023. This subdued pace suggests weak domestic demand and rising slack in the economy. The unemployment rate has drifted up from a low of 3.4% in July 2022 to 4.3% in June 2025.

The international backdrop adds to the case for easing monetary policy. Trade tensions have increased, particularly after the announcement of new tariffs by the United States. This raises downside risks to global growth and commodity demand, which is important for the Australian economy.

Most observers now expect the RBA to cut the cash rate by 25 basis points in August, taking it to 3.6%. Markets are pricing in further easing by year-end, with expectations centred on a rate close to 3.1%. If inflation continues to drift lower and labour market conditions weaken further, those cuts may well materialise.

In sum, the RBA has used tight monetary policy to bring inflation back under control. As inflation has declined, it has begun to ease policy gradually. While the decision to hold rates steady in July surprised markets, it looks understandable with hindsight. The available inflation data were limited and somewhat dated, and the RBA’s caution appears justified.

With the second quarter inflation data now published and showing underlying inflation at 0.7% for the quarter and 2.7% year-over-year, broadly in line with the RBA’s forecast for June, the case for a rate cut has strengthened. This new data also alleviates potential concerns about cutting rates while the labour market softens. A 25 basis point cut at the August meeting now looks not only possible, but likely.

Important Information

The value of investments and the income derived from them can fall as well as rise, and past performance is no indicator of future performance. Investment products may be subject to investment risks involving, but not limited to, possible loss of all or part of the principal invested.

This document does not constitute and shall not be construed as a prospectus, advertisement, public offering or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. It is not intended to be a final representation of the terms and conditions of any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction. The information in this document does not take into account the specific investment objectives, financial situation or particular needs of the recipient. You should seek your own professional advice suitable to your particular circumstances prior to making any investment or if you are in doubt as to the information in this document.

Although information in this document has been obtained from sources believed to be reliable, no member of the EFG group represents or warrants its accuracy, and such information may be incomplete or condensed. Any opinions in this document are subject to change without notice. This document may contain personal opinions which do not necessarily reflect the position of any member of the EFG group. To the fullest extent permissible by law, no member of the EFG group shall be responsible for the consequences of any errors or omissions herein, or reliance upon any opinion or statement contained herein, and each member of the EFG group expressly disclaims any liability, including (without limitation) liability for incidental or consequential damages, arising from the same or resulting from any action or inaction on the part of the recipient in reliance on this document.
The availability of this document in any jurisdiction or country may be contrary to local law or regulation and persons who come into possession of this document should inform themselves of and observe any restrictions. This document may not be reproduced, disclosed or distributed (in whole or in part) to any other person without prior written permission from an authorised member of the EFG group.

This document has been produced by EFG Asset Management (UK) Limited for use by the EFG group and the worldwide subsidiaries and affiliates within the EFG group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 7389746. Registered address: EFG Asset Management (UK) Limited, Park House, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111.