Quick Bites | Reflections on the RBA cut

Quick Bite – Reflections on the RBA cut

As all who follow the news know, the Reserve Bank of Australia (RBA) delivered a widely expected 25 bps rate cut at this week’s monetary policy meeting, lowering the cash rate to 3.60%, and marking its third rate cut this year. The decision was unanimous, and the accompanying statement struck a neutral or slightly dovish tone, confirming that the Bank remains on a steady easing path, but without signalling any urgency regarding adjustments to its policy stance.

Source: RBA, Wells Fargo

The RBA downgraded its GDP growth outlook due to persistently weak productivity, while inflation and unemployment forecasts were left broadly unchanged. Governor Michelle Bullock reiterated that Australia’s shallower hiking cycle means it may not need to cut rates as deeply as other advanced economies.

Recent labour market and wage data support the RBA’s cautious stance. July’s jobs report showed a strong rise in full-time employment and a drop in underemployment, while Q2 wage growth unexpectedly held steady at 3.4% year-on-year.

Uncertainties surrounding weak productivity and the dynamics of elevated labour costs remain an important area of focus for the RBA. Against this backdrop, and with the Productivity Roundtable scheduled for next week, the central bank is likely to wait for confirming evidence of improving productivity and moderating wages before contemplating a faster pace of monetary easing. With those improving productivity and costs likely to reveal themselves only gradually over time, the futures markets view a continued quarterly series of rate cuts as probable. Most expectations centre around further 25 bps cuts in November and February, bringing the cash rate to 3.10% by early 2026, with risks tilted slightly toward an even slower pace of easing.

Source: RBA

Reserve Bank of Australia Cuts Rates, Signals a Steady Easing Bias

Given the widely expected nature of the rate cut, market attention shifted to the RBA’s updated economic projections within the release of its Statement on Monetary Policy (SoMP). The SoMP provided deeper insights into the RBA’s thinking and revealed some notable developments:

1. The most significant revision came in the form of downgraded GDP growth projections. The RBA attributed this to a weaker outlook for productivity growth, stating that “consistently weaker-than-expected productivity growth has led us to revise down our productivity assumption.” This adjustment affects the entire forecast horizon and reflects a more cautious stance on Australia’s medium-term growth prospects.

   

   Source: Wells Fargo

2. On inflation, the RBA noted that underlying inflation continues to ease toward the midpoint of its 2–3% target range and is expected to remain sustainably around that level. This was reflected in the unchanged inflation forecasts, with the newly added projection for Q4 2027 placing trimmed mean inflation at 2.5%.
3. On employment, they acknowledged that labour market conditions have softened slightly in recent months, though they maintained that conditions remain “a little tight”. This is a minor shift from the previous characterization of conditions as remaining “tight.” Importantly, unemployment forecasts were left unchanged, implying no expected rise in the jobless rate.

   
   Source: Wells Fargo

4. On the external front, the RBA acknowledged that global growth may come in below previous projections. However, it also noted that there is now greater clarity around the scope and scale of US tariffs and the policy responses from other countries which reduces the likelihood of more extreme outcomes.

Importantly, the RBA indicated that the reduced growth projection largely reflected the weaker outlook for productivity and thus potential GDP growth, which it now views as close to 2%, but that it did not substantially alter its assessment of the economy’s demand-supply balance. As a result, the RBA’s outlook for inflation and the unemployment rate were essentially unchanged, and the more subdued growth forecast does not change much for expectations of the immediate path of monetary policy ahead.