Australia’s headline Consumer Price Index for the second quarter of 2025 rose by 2.1% year-on-year, slightly below the anticipated 2.2%. The trimmed mean CPI matched expectations by increasing 2.7% year-on-year. These results are anticipated to lead to a Reserve Bank of Australia cash rate cut of 25 basis points in August.
Consumer prices grew at the slowest pace observed in over four years, with core inflation reaching a new three-year low. As a result of the inflation data, the Australian dollar has weakened. The upcoming Reserve Bank of Australia meeting will take place on August 11 and 12.
Upcoming RBA Rate Decision
With the headline inflation numbers for Q2 2025 coming in soft, we see a Reserve Bank of Australia rate cut next month as nearly certain. The market is now pricing in an over 90% probability of a 25 basis point cut at the August 12th meeting. This creates clear opportunities in the weeks ahead.
Traders should position for falling interest rates, primarily by receiving fixed rates in the swaps market. This outlook is reinforced by recent data, such as the weak June 2025 retail sales figures released last week, which pointed to slowing consumer activity. These position should be established before the RBA meeting.
We also expect Australian government bond futures to rally, especially the 3-year contract which is most sensitive to cash rate expectations. Bond prices move higher as yields fall in anticipation of central bank easing. Looking back to the pre-easing environment of 2019, we saw the market front-run the RBA’s actions, and we expect a similar pattern now.
Impact on Currency and Stocks
The Australian dollar is set to weaken further, particularly against the US dollar where the Federal Reserve is expected to remain on hold. This policy divergence makes buying AUD/USD put options a compelling strategy to profit from or hedge against a lower currency. A break below the year-to-date lows seems increasingly likely.
For the stock market, these developments are supportive for the ASX 200 index. Lower borrowing costs benefit rate-sensitive sectors like real estate and banking. We anticipate buying activity in ASX 200 futures as investors position for a more accommodative monetary policy environment.
This view is further supported by the latest jobs report for June 2025, which showed the unemployment rate ticking up to 4.2%. This gives the RBA a dual reason to cut rates, addressing both below-target inflation and a softening labour market. Governor Bullock’s recent speeches have already signaled a data-dependent and more dovish stance.
