The Reserve Bank of Australia (RBA) has reduced the cash rate by 25 basis points to 3.60%, aligning with earlier predictions. This adjustment reflects an improving balance within the economy and suggests the central bank’s approach remains responsive to data trends rather than individual data points.
There is potential for another rate reduction in the fourth quarter, possibly lowering the terminal cash rate to 3.35%. However, if a sharp economic decline occurs, a more extensive series of rate cuts could follow.
RBA’s Revised Projections
The RBA aims for a cash rate of 2.9% by the end of 2026, revising its previous forecast of 3.2%. It projects the unemployment rate and trimmed mean CPI to stay at 4.3% and 2.6% respectively by late 2025, while downgrading its 2025 GDP growth forecast from 2.1% to 1.7%.
During a press conference, the downgrade of trend productivity growth to 0.7% per annum was addressed. The RBA intends to resolve forecast reconciliations without specific productivity predictions, maintaining focus on comprehensive data trends for policy rate decisions.
The Reserve Bank of Australia has cut the cash rate to 3.60%, which was a move we had largely anticipated. This confirms the bank is now reacting to a slowing economy rather than just stubborn inflation. We see this as a clear signal that the peak of the tightening cycle, which we experienced back in 2023, is firmly behind us.
With another rate cut to 3.35% now very possible in the fourth quarter, we should consider positioning for lower yields. Australian 3-year government bond futures look attractive, as they are most sensitive to these near-term policy shifts. Recent data from the Australian Bureau of Statistics showing July unemployment ticking up to 4.2% only strengthens the case for the RBA to act again soon.
Implications for Currency and Markets
This dovish policy path is likely to put downward pressure on the Australian dollar against the US dollar. Given the newly downgraded GDP forecast of 1.7% for this year, we should view any rallies in the AUD as a selling opportunity. August’s weak consumer sentiment figures further suggest the domestic economy lacks momentum, making our currency less appealing to foreign investors.
For the stock market, the situation is more balanced, creating opportunities in volatility plays using options on the ASX 200. While lower rates are typically a tailwind for equities, the reason for the cuts is the downgraded productivity and growth outlook. We believe rate-sensitive sectors like real estate and utilities may outperform, but the broader index could struggle for clear direction.
Looking further ahead, the RBA’s own forecast for a 2.9% cash rate by the end of 2026 suggests this easing cycle has more room to run. This supports a longer-term strategy of receiving fixed rates on interest rate swaps. This sustained dovish outlook is a significant reversal from the aggressive rate hikes we saw just two years ago.
