RBA poised for third rate cut as slowing economy prompts urgent action
RBA Expected to Deliver Third Rate Cut as Inflation Eases and Economy Slows
A Reuters poll of economists has predicted that the Reserve Bank of Australia (RBA) will ease policy more than expected in May, with a strong majority forecasting a third 25 basis point rate cut on Tuesday. The poll, conducted between June 30 and July 3, showed that 31 out of 37 economists believed the RBA would reduce its official cash rate to 3.60% at the end of its two-day meeting on July 8.
Market Expectations Shift from Three to Five Rate Cuts
Financial markets and economists had previously forecast three RBA rate cuts this year, but in May, they raised their projections to four, and now see five, driven by inflation falling faster than expected and a weakening growth outlook. The shift in expectations is largely due to the fact that inflation has cooled down significantly, from 2.5% at the start of the year to 2.1% in May, which is within the RBA’s 2-3% target band but near the upper bound.
Inflation and Economic Growth Outlook
Over 60% of respondents in the poll forecast another quarter-point cut this quarter, taking the cash rate to 3.35%. While there was no clear consensus among economists on where the rate would end 2025, 16 out of 33 projected 3.10%, 15 expected 3.35%, one each saw 3.60% and 2.85%. The economy is forecast to grow 1.6% this year and 2.3% in 2026, a downgrade from 2.0% and 2.4% from the April poll.
Economists Weigh in on RBA’s Easing Cycle
Philip O’Donaghoe, chief economist for Australia and New Zealand at Deutsche Bank, said that the May meeting was notably more dovish in its outlook, which will manifest in cutting in July. He suspects that the RBA will keep the option open for further easing and that’s why there will be a follow-up cut in August.
Trade Deal and Global Headwinds
Some economists flagged the lack of a trade deal ahead of the July 9 expiry of a 90-day pause on U.S. President Donald Trump’s sweeping tariffs on trading partners announced in April as a downside risk to the economy and RBA rates. Taylor Nugent, senior economist at NAB, said that if some of those global headwinds feed through into more precautionary saving from households, then that could spur the RBA to deliver a little bit more support.
Australian Dollar Gains
Despite deeper rate cut expectations, the Australian dollar has gained over 6% so far this year, lifted by broad U.S. dollar weakness, and was forecast to strengthen about 2% over the next six months in a separate Reuters poll.
Conclusion
The RBA is expected to deliver a third rate cut as inflation eases and the economy slows. The shift in expectations is largely due to the fact that inflation has cooled down significantly, from 2.5% at the start of the year to 2.1% in May. While there was no clear consensus among economists on where the rate would end 2025, most projected a further easing of rates in the coming months. The RBA’s task now is to make sure that the economy grows strongly enough to keep the labour market strong and prevent unemployment from rising.
