The Reserve Bank of Australia (RBA) has taken another step in its gradual monetary easing cycle, cutting the official cash rate by 0.25 percentage points to 3.6%. The move, announced at the latest monetary policy meeting, reflects the central bank’s careful balancing act: keeping inflation under control while ensuring economic growth doesn’t stall.
At its most recent monetary policy meeting on 13th August the RBA lowered the official cash rate from 3.85% to 3.6%. For households, businesses, and investors, this decision has direct implications — from mortgage repayments to business borrowing costs, to the broader confidence in Australia’s economy. Let’s unpack what happened, why it happened, and what could come next.
The RBA’s latest cut marks its second rate reduction this year, continuing a trend towards more accommodative policy. The official cash rate is now at 3.6%, down from 3.85% before the decision.
In its statement, the RBA emphasized two central points:
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Inflation is easing—though still elevated in some areas, it is moving closer to the target range.
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Global uncertainty remains high—international developments, especially in the US and China, could weigh on Australia’s growth prospects.
While the decision was widely anticipated by financial markets, its timing signals that the RBA is prioritizing sustained economic stability over aggressive tightening or loosening.
1. Inflation is Easing
Inflation has been the central economic story of the past three years, surging in 2022 and early 2023 due to supply chain disruptions, strong consumer demand, and higher energy prices. But recent data show that inflation is now moderating.
The RBA’s preferred measure, the trimmed mean inflation rate, came in at 2.1% in June, the lowest since 2021 and well within striking distance of the 2–3% target band.
Source: tradingeconomics.com
A slower pace of price increases eases pressure on household budgets and reduces the risk of inflation expectations becoming entrenched. This gives the RBA room to cut rates without immediately risking an inflation flare-up.
2. Global Uncertainty
The international environment is still far from stable. The US faces ongoing trade tensions and possible economic slowdown, while China’s recovery has been uneven. Both economies have significant spillover effects on Australia, particularly through trade, investment, and commodity prices.
By easing rates now, the RBA is pre-emptively cushioning the economy against potential external shocks. It’s a classic “insurance” cut—acting before conditions worsen.
What’s Happening in Australia’s Economy?
As mentioned, inflation is easing but not evenly across sectors. Goods prices have stabilised, largely due to falling shipping costs and improved global supply chains. However, services inflation — especially in health, insurance, and education — remains stubbornly high.
For households, this means everyday expenses like groceries and petrol may feel more manageable, but other bills are still rising.
The unemployment rate rose slightly to 4.3%, indicating a softening labour market. While still historically low, this uptick suggests that hiring momentum is slowing. A modest increase in unemployment helps relieve wage-push inflation pressures but also raises concerns about consumer spending power.
Wages have been growing at their fastest pace in over a decade, driven by labour shortages in some industries and high living costs prompting demands for pay rises. While strong wage growth supports household income, it can also feed into business costs, which in turn may slow the pace of inflation’s decline.
Why the RBA is Moving Carefully
Central banking is a delicate balancing act between stimulating the economy and keeping inflation under control. The RBA doesn’t want to cut rates too quickly, which could reignite inflation, but it also wants to avoid keeping rates high for so long that the economy slows more than necessary.
By trimming rates by 0.25% rather than making a larger move, the RBA signals that it is taking a “wait and see” approach—responding to data rather than committing to an aggressive easing path.
What Does This Mean for Interest Rates Going Forward?
Market analysts broadly expect the RBA to continue with small, measured cuts through the rest of the year. If inflation continues to edge lower and the labour market doesn’t weaken too sharply, we could see the cash rate at around 3.35% by December.
However, the RBA has made it clear that its decisions will be data-dependent. If inflation stalls above target or if wage growth accelerates further, rate cuts may pause—or even reverse.
How This Affects You
Easing rates can make mortgages more affordable in the short term, but they can also boost housing demand, potentially putting upward pressure on prices. If you’re entering the market, it’s wise to focus on long-term affordability rather than just the initial monthly repayments.
On the flip side, lower rates reduce the return on savings accounts and term deposits. Retirees relying on interest income may need to seek alternative investments or adjust their budgets.
For investors whose portfolios are structured more towards defensive assets such as bonds the effect of falling rates is less clear. While short term yields (ie term deposits) are related to the RBA’s cash rate, longer yields (ie bonds with duration greater than 1 year) are driven more by bond traders who are pricing in expectations around inflation, labour, productivity, as well as external economic considerations (ie, how Australia’s major trading partners are doing).
However, bond yields have now stabilized since the sudden spike in inflation back in 2022, meaning that yields now have plenty of scope to move lower if there is a significant market downturn in equities. Lower yields will mean stronger returns from bonds than just their yield to maturity would indicate. With inflation now back in the RBA’s target band of 2% to 3% we expect bonds to be a strong defensive part of a portfolio and offer attractive returns going forward.
The Broader Economic Impact
Rate cuts often boost consumer sentiment, making people feel more comfortable spending. Increased spending can help support retail, hospitality, and service sectors.
Equities tend to respond positively to lower interest rates, as they make shares more attractive relative to bonds and can improve corporate earnings prospects. Property markets may also see renewed interest from investors.
Lower rates can weaken the Australian dollar, making exports more competitive but increasing the cost of imports. This can help exporters but may keep imported goods prices higher.
Longer bond rates are less affected by RBA cuts to the overnight cash rate, but nonetheless the lower inflation readings – which are one of the main reasons the RBA cuts rates – are also one of the main drivers of longer bond yields.
Dr Steve Garth
August 2025