Will the RBA Reduce Rates at the July Meeting?
On the 7th and 8th of July, the RBA will meet to decide whether to proceed with an interest rate cut. RBA Governor Michele Bullock is set to announce their decision on the 8th. Markets and economists alike are closely watching this meeting, with growing confidence that an RBA interest rate cut is imminent.
The current cash rate sits at 3.85%. Financial markets have already priced in a 97% chance of a 25-basis point cut in July. Economists are also backing the easing, pointing to improving inflation data and broader economic indicators.
Why Markets Expect an RBA Interest Rate Cut
The reasons for the extreme confidence in the reduction comes down to a few key data points:
- Inflation rates – price pressures in Australia seem under control, with recent CPI data at the end of May coming in at 2.1% for the year from 2.4% in April, which was under median forecasts of 2.3%. Trimmed mean inflation, which is the measure of core inflation by removing the most extreme price changes was down to 2.4% from 2.8% over the same period. It is worth noting that this is the lowest reading since late 2021 and well within the RBA’s target band of a rate between 2-3%. Now focus on economic growth and productivity comes into view.
- Wages – the Wage Price Index rose 0.9% in the March quarter to 3.4% annually, which is now outpacing the inflation rate. Naturally, rising wages support spending and demand for goods and services. The figures show cost-of-living pressures may be starting to ease, particularly for those struggling with mortgage payments.
- AUD/USD – it has been a struggle recently for the Australian dollar with Chinese economic growth stagnating, Australian material prices subdued and Donald Trump’s Liberation Day announcement plummeting the AUD below 60 US cents. This has now partially recovered to 65.8 cents or approximately 10.8%.
US inflation is also within their 2-3% target. However, it did tick up in their latest May reading from 2.1% to 2.3%. Together with the Federal Reserve holding rates at their meeting two weeks ago (much to Trump’s dismay). With Australia decreasing rates while the US hold, this weakens the AUD but this is likely to already priced into current exchange rates.
It is important to control the value of your currency as exports out of Australia are cheaper. This can lead to lower revenues for Australian businesses. It is also more expensive for consumers traveling abroad. The AUD/EUR and AUD/GBP not in a good place to put it lightly. It’s safe to say that I would not like to see the increase in costs of the European summer currently underway for Australian consumers.
So Where to From Here?
All big four banks in Australia agree that the rate cuts are coming. Though they are split on the size and timing of these. They predict a cash rate range of between 3.1% to 3.35% by the end of 2026. Only time will tell who is correct.
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