RBA to cut rates in August as inflation falls to lowest since 2021

The fall in inflation gives the Reserve Bank the green light to cut rates for a third time this year, with borrowers set to save $90 a month on a typical mortgage.

The RBA is expected to cut rates another two times this year after inflation fell more than expected. Picture: Nicole Garmston

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Lock it in, Michele Bullock.

The path to further interest rate cuts by the Reserve Bank is now clear after inflation fell more than expected, sending the share market to a near record high as investors bet on lower rates ahead.

Australia’s key measure of underlying inflation – the trimmed mean – rose just 0.6 per cent in the June quarter, below a 0.7 per cent rise expected by economists, lowering the annual rate to 2.7 per cent. It’s the lowest level in 3.5 years and comfortably inside the RBA’s 2-3 per cent target band.

The data sparked a further rally in financial markets, with the ASX 200 closing 0.6 per cent higher at a near record high of 8756.4 points on Wednesday. Property trusts, banks and retailers jumped on expectations that lower interest rates will boost consumer spending and ease mortgage stress.

An August rate cut is now priced as a certainty, and a second cut is fully expected by November.

The cash rate target is forecast to be near 3.0 per cent by May, versus 3.85 per cent now.

Policy caution creating new risks

It comes as the RBA board’s inflation caution since May has put the economy at risk of a further slowdown at a time when growth is already flatlining. And consumer sentiment has been depressed for years, and the unemployment is potentially rising sharply from very low levels. The latest data should allay inflation concerns and allow policymakers to focus on supporting economic activity.

Australians have been cautious about spending to offset higher mortgage bills. Picture: Gaye Gerard/NewsWire

RBC chief economist Su-Lin Ong says the latest data should give the RBA confidence that inflation is “firmly within target and heading to midpoint” while “policy is, accordingly, too restrictive amid tepid growth and a labour market that is moving closer to balance.”

“A 25bp cut at the August meeting is all but assured,” she said.

Goldman Sachs chief economist Andrew Boak says the data support expectations for August cut, as underlying inflation pressures “risk undershooting the 2.5 per cent midpoint going forward.”

“We continue to expect the RBA to resume its easing cycle with a 25bp cut in August, followed by quarterly cuts in November and February to a terminal rate of 3.1 per cent,” he said. “We view the risks as firmly skewed to a faster and deeper easing cycle.”

Broad-based cooling

The inflation cool-down was broadbased, with key areas of RBA concern showing marked improvement. Services inflation – closely watched because it reflects domestic wage pressures – fell to 3.3 per cent annually from 3.7 per cent, the lowest since June 2022.

Rental price growth, while still elevated, eased to 4.5 per cent annually from 5.5 per cent in the previous quarter. Home building costs rose just 0.7 per cent annually, the slowest since mid-2020.

NAB head of markets economics, Tapas Strickland, said the data “locks in an August rate cut” as the RBA’s gradual disinflation narrative remains on track.

“The RBA was waiting for Q2 CPI data to see whether it still supported the board’s expectation of inflation declining slowly towards 2.5 per cent,” he said.

“In our view, this gradual disinflation narrative remains on track.”

Relief for mortgage holders

The prospect of rate cuts brings welcome relief for Australia’s mortgage holders, who have endured 13 rate rises since May 2022 and have seen just two cuts since.

An owner-occupier with a $600,000 debt and 25 years on their loan could see monthly repayments drop by $90 on the back of one 0.25 percentage point RBA cut, assuming banks pass it on in full to existing variable rate borrowers.

That relief could come as soon as August 12, when the RBA board next meets. Money markets are pricing a 100 per cent chance of a cut at that meeting, with speculation building about whether the central bank might accelerate its easing cycle.

Market momentum building

The strong market reaction reflects growing confidence that Australia’s interest rate cycle has turned.

The property trusts sector rose 1.3 per cent and excluding data-centre heavyweight, Goodman Group, the major property trusts rose between 1.6 and 2.7 per cent on bets that lower rates will support property values and construction activity.

The major banks also rallied despite the prospect of lower net interest margins, with Commonwealth Bank rising 1.6 per cent as interest rate cuts could support share market valuations. Consumer discretionary stocks jumped on hopes that rate cuts will boost spending, with JB Hi-Fi up 3.9 per cent.

Cautious optimism

Despite the inflation fall, the RBA will likely maintain its measured approach to easing.

The central bank has repeatedly emphasised it wants to move gradually, reflecting uncertainty about the neutral rate and global economic conditions.

In her press conference this month, RBA governor Bullock said the decision to leave interest rates on hold was “about timing rather than direction.”

But with inflation now clearly within the target band and economic growth struggling, the case for maintaining restrictive monetary policy is becoming harder to justify.

As Goldman Sachs’ Boak notes, sequential measures of inflation are now tracking “close to or slightly below the midpoint of the RBA’s target band” over three, six and nine-months.

For borrowers and investors, the message is clear: further relief is coming.

Originally published as RBA to cut rates in August as inflation falls to lowest since 2021