Watchful RBA cuts interest rates but keeps eyes on global economic issues

Borrowers are breathing a sigh of relief that the Reserve Bank of Australia (RBA) overcame its fears around economic uncertainties to lower interest rates by 0.25 per cent.

The decline in the rate of annual inflation proved too much to ignore at the RBA’s Tuesday meeting (12 August).

In cutting the rate from 3.85 to 3.60 per cent, the minutes of the RBA’s Monetary Policy Board Meeting noted that with underlying inflation continuing to decline back towards the midpoint of the 2–3 per cent range and labour market conditions easing slightly, a further easing of monetary policy was appropriate.

“This takes the decline in the cash rate since the beginning of the year to 75 basis points (but) the Board nevertheless remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and potential supply,” the minutes noted.

It added that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia.

Most economic observers are predicting at least one more interest rate cut before the year ends.

BMI, a unit of Fitch Solutions, was tipping the cash rate would land at 3.35 per cent as 2025 drew to a close but said inflationary risks had not necessarily been fully dispelled.

“We expect policymakers to prioritise keeping inflation below the upper bound of the target range while also managing risks to household finances and supporting economic growth.

“At the same time, renewed trade tariffs and a possible re-escalation of geopolitical tensions in the Middle East could generate fresh inflationary pressures.

“Such developments may prompt the RBA to pause its easing cycle or, in a more adverse scenario, consider reversing its policy stance,” the BMI commentary noted.

While the RBA has delivered some relief earlier this year, Compare the Market Economic Director, David Koch, said it was time to give people with a mortgage a “bigger break”.

“Young homeowners paying off a mortgage have carried the nation through the cost-of-living crisis,” Mr Koch said.

“They’ve had the worst of everything – higher prices at the supermarket, higher rates at the bank, plus the cost of everything from insurance to council rates going up.  

“And of course, they had to spend much more to purchase a home in the first place.

“It’s thanks to their efforts that inflation is back in the Reserve Bank’s target range. They’ve tightened their belts, cut back on spending, and reckon its time some of that pressure came off.”

For a borrower with a $600,000 mortgage at the start of the cuts, this move would see their minimum monthly repayments drop by a further $89.

However, with two cuts already in effect, the total drop across the February, May and August cuts would be $272 if the full rate cut is passed on by the lenders.

Peter White AM, Managing Director, Finance Brokers Association of Australia (FBAA), said a lower rate will allow more people to access funds needed to purchase or refinance,

“As APRA are refusing to budge on the buffer rate, every reduction in the interest rate helps more people.”

With interest rates being uncertain at the moment, he said mortgage brokers are being asked by customers whether they should be looking at fixed or variable loans.

“A recommended option for those who are unsure is to take a part fixed and part variable rate structure, particularly as the expectation is that rates will continue to trend downwards into 2026, before entering a static phase.”

RBA still has its worries

While the market was near-certain that this latest interest rate cut was coming and that more are around the corner, the RBA continues to play its cards close to its chest.

After shocking many by keeping rates on hold at its 8 July meeting, the RBA has backed up that conservative approach in its August monetary policy announcement.

“Uncertainty in the world economy remains elevated,” the RBA noted.

“There is a little more clarity on the scope and scale of US tariffs and policy responses in other countries, suggesting that more extreme outcomes are likely to be avoided.

“Trade policy developments are nevertheless still expected to have an adverse effect on global economic activity, and there remains a risk that households and firms delay expenditure pending still greater clarity on the outlook.

“As in May, the forecasts assume that both effects weigh on activity and inflation in Australia for a period.”

Dwyfor Evans, Head of APAC Macro Strategy at State Street Markets, said Q2 headline CPI likely gave the RBA confirmation that inflation is trending in the right direction and inflation expectations have remained broadly unchanged.

But he stressed that the market may be overcooking its expectations for more rate cuts.

“Caution was reiterated (by the RBA): the labour market remains tight and the impact of tariffs and fiscal spending compelled the RBA to deliver a message of gradualism on policy.

“One significant unknown is the RBA’s estimate of the neutral rate and we maintain the view that caution implies that the central banks delivers fewer rate cuts than markets expect.

“We acknowledge though that the RBA remains in data watching mode for now.”

Dr Isaac Gross, Department of Economics, Monash Business School, was slightly more hawkish about the prospect of further rate cuts.

“The RBA was gun shy in July as it awaited an update of the most recent set of inflation statistics, however, with underlying inflation falling to 2.7 per cent, the RBA has felt comfortable lowering the cash rate by 25 basis points.

“The Reserve Bank’s announcement said that it still expects inflation to return to target.

“We should expect to see one or two more cuts over the rest of the year as inflation continues to moderate.”

Banks pass rate cut on in full

All four of the major bans have announced they will pass the rate cut on to borrowers.

ANZ will be passing on the cut on 22 August, alongside CBA. 

NAB has broken its practice of passing on RBA rate changes 10 days after a cash rate decision, by announcing it will implement the cut in 13 days on 25 August. 

Westpac said it will do so on 26 August, which is standard practice for the bank. 

The new lowest big four bank variable rate will be 5.34 per cent, offered by both CBA and Westpac on their digital-only loans.