We continue to expect RBA to hold in July and cut in August and November. A lower inflation outlook now makes two further cuts in early 2026 likely.
We have retained our current expectations for the near-term path for the RBA cash rate: a 25bp cut in August – not July – and another in November. We have added two more 25bp cuts in early 2026 (February and May), though they could be earlier (December and February or February and March) if inflation and the labour market turn out weaker late in 2025 than we currently expect. That would mean RBA cash rate will bottom out at 2.85%, from a peak of 4.35%, and 3.85% currently. We regard the cash rate at 2.85% as being at the lower end of the ‘neutral range’.
A few months ago, in February, the RBA was sceptical that it would cut rates at all, beyond removing the ‘insurance’ against upside risks that it had taken out in November 2023. At its latest (May) meeting it was confident enough in the disinflation so far that it was comfortable with the market pricing for the cash rate.
Let’s not get ahead of ourselves, though. The Board described itself as having a preference to move cautiously and predictably. This is code for not wanting to do back-to-back cuts. It also made it clear in the minutes that this was about reducing restrictiveness, not moving quickly back to neutral in the style of the Federal Reserve last year. And the Board is not in the habit of changing policy just because the market is pricing it in.
Nothing that has happened since, including a disappointing GDP number, has been enough to tip the RBA into changing its mind in the near term. Neither is the data flow between now and the next meeting likely to shift the dial on the near-term outlook. The May labour force data out next week is likely to show a labour market that still looks tighter than the RBA’s view of full employment. And while the May monthly CPI indicator, to be published on 25 June, is likely to be a low one, the steer from April and May suggests that June quarter CPI is likely to be a bit above what the RBA is forecasting. Given this, the overall data flow will be enough to convince the Board that further reduction in policy restrictiveness is warranted. It will not, however, be enough to induce it to rush that withdrawal of restrictiveness.
Looking forward, though, the arguments in favour of doing more than 50bps more (two cuts) are building. In particular, the outlook for inflation is shifting in the face of slowing population growth and a handover from public to private sector demand growth that is looking shakier.
Recent data has made it clear that population growth is unwinding a bit faster than previously thought. We have assessed that this is enough to have implications for housing costs, particularly rents. Over time, this puts a little more downside into measures of underlying inflation. We are also seeing a bit more downside in some parts of services inflation.
In our view, these and other shifts are enough to take trimmed mean inflation below the midpoint of the target range for a time, starting around the end of this year. We believe that would tip the RBA in favour of cutting the cash rate further. Our previous forecasts did not have trimmed mean inflation going below the 2.5% midpoint of the RBA’s 2–3% inflation target. Such a forecast would not have comported with a policy stance involving the real (inflation-adjusted) cash rate as low as a 2.85% nominal cash rate implies. But our current forecasts, as released by Westpac Senior Economic Justin Smirk this morning, are enough to change the policy calculus.
Indeed, if we are right, the RBA might be in for a bit of an ‘oh crikey!’ moment late this year. A ‘shaky handover’ from the post-expansion normalisation in the care economy and the completion of a raft of state government infrastructure projects could weigh on both output and employment. The parallels with the late 2010s we have previously highlighted could become even clearer. Consumer spending is tracking weakly, as we expected. We are now starting to see this weigh on business activity. The result is likely to be soggy growth and surprisingly weak wages growth despite apparently low unemployment (and despite the RBA’s beliefs about the implications of below-par measured productivity growth). In that case, what at first looked like an inflation trajectory solidly anchored at or above the 2.5% midpoint of the target range will instead look more like our forecasts, drifting below 2.5% for a time.
(We also cannot rule out that the forthcoming update to the Statement on the Conduct of Monetary Policy refines the language on how assiduous the RBA needs to be about hitting the 2.5% midpoint of the target range exactly. When the Governor flagged at last month’s media conference that a new agreement was in the works, it did raise the question of why the current agreement needed revision, less than 18 months after it was published. If a new agreement is finalised soon, the current one will be the shortest-lived of any of them other than the 2006 agreement superseded by the change of government in 2007. This could just be an update now that the new Monetary Policy Board is in place. But perhaps the February episode also spurred a ‘no, not like that!’ reaction in the Government. We will know soon enough.)
As we have previously noted, the risks remain on the downside. It is possible that some of these cuts come a bit faster than the ‘cautious’ path we currently have pencilled in. This will depend on the evolving data flow, particularly for the labour market and inflation, as well as the RBA’s evolving beliefs about what constitutes full employment.
