As Expected, RBA Trims Rates - Markets Yawn, Borrowers Smile

As expected, the RBA cut the cash rate by 25 bps to 3.6% at its August meeting. Even your Uber driver could have predicted the outcome given recent data!

However, rather than focussing on the interest rate cut they all so desperately wanted last meeting, the Australian media is more focused on the federal government’s productivity roundtable to be held from 19 to 21 August.

The RBA had included a section on productivity in its August Statement of Monetary Policy and reporters were begging the governor for some big soundbites on productivity. Unsurprisingly, Michele Bullock did not take the bait and instead focused on how the RBA is bringing down interest rates while maintaining historically low unemployment. Boring but good.

What the RBA’s said?

“In the June quarter, trimmed mean inflation over the year fell to 2.7 per cent, broadly as expected in May.”

“Updated staff forecasts for the August meeting suggest that underlying inflation will continue to moderate to around the midpoint of the 2–3 per cent range, with the cash rate assumed to follow a gradual easing path.”

“Domestically, private demand appears to have been recovering gradually, real household incomes have picked up and some measures of financial conditions have eased.”

“Various indicators suggest that labour market conditions remain a little tight, although have eased further in recent months.”

“Looking through quarterly volatility, wages growth has eased from its peak but productivity growth has not picked up and growth in unit labour costs remains high.”

“There is a risk that consumption growth is a little slower than expected, which could weigh on growth in aggregate demand and lead to weaker labour market conditions.”

Statement by the Reserve Bank Board: Monetary Policy Decision, 12 August 2025.

https://www.rba.gov.au/media-releases/2025/mr-25-22.html

What the governor said at the press conference

“The Board has cut the cash rate 75 bps since February this year as we’ve become increasingly confident that inflation is on track to be in our 2% to 3% target range on a sustained basis.”

“Forecasts imply that the cash rate may need to be a bit lower than it is today to keep inflation lower and stable, and employment growing.”

“Global outlook remains unpredictable although it seems the risk of a wider and more damaging trade war has eased a bit.”

“Monetary Policy remains well positioned to respond to shocks that come our way.”

“There was no discussion of a large rate cut.”

“Sharemarkets seem pretty sanguine at the moment about everything that is going on.”

Recent data guaranteed the cut

The RBA is feeling good. At the post-meeting press conference in July, Bullock explained that the Monetary Policy Board needed more data to confirm that underlying inflation (trimmed-mean inflation) was continuing its fall.

“... what we’re looking for is confirmation that we are on our forecast path.” Michele Bullock, press conference, 8 July 2025.

The RBA now has that data. June-quarter inflation shows underlying inflation is continuing its downward trajectory into the middle of the RBA’s 2% to 3% target zone (see chart below).

The RBA’s August forecast also shows the downward movement of underlying inflation continuing gradually into the future (see chart below).

Unemployment also ticked up a little from 4.1% in May to 4.3% in June, which suggests that the tight labour market is easing a little. This means that the RBA can focus more on keeping unemployment low rather than any potential increase in wages from a too-tight labour market.

Lower productivity, lower growth

Continuing a recent trend, the RBA revised down productivity growth for its forecast period. Since the end of the pandemic, productivity growth has slumped in Australia, as it has in most countries (see chart below).

“... the persistent headwinds that have lowered productivity growth over recent decades are likely to continue over the next couple of years.” RBA Statement of Monetary Policy August 2025.

Bullock dismissed productivity as a big concern for the RBA during her press conference. She argued that supply and demand were both being impacted by slumping productivity but that the gap between the two was not really changing as a result. Lower productivity affects the supply side by reducing potential output. It affects the demand side through lower real wages and thus consumer demand.

“Domestically, supply and demand in the labour market – and the economy more broadly – are expected to be close to balance over the forecast period,” RBA Statement of Monetary Policy August 2025.

Bullock, however, did note that lower expected productivity would mean slightly lower economic growth over the forecast period (see chart below), and that the RBA now assumed that the cash rate would need to be slightly lower than previously forecast to keep unemployment in check.

Source: RBA Statement of Monetary Policy, August 2025.

In the past, Bullock has expressed concern about rising wages not being supported by productivity growth. She did not want to see excessive wage growth pushing up inflation. But wage growth has now slowed and with some steam coming out of the labour market and inflation falling, the RBA expects it to slow further (see chart below). Demand is also not as strong as it was. The RBA is not as worried as it was about productivity with respect to inflation.

Bullock did once again point out the connection between long-term productivity growth and Australia’s standard of living. But she was determined not to give any juicy soundbite to a begging media ahead of the federal government’s productivity round table to be held next week. Long-term productivity is not within the mandate of the RBA, but it is within the mandate of the government and Productivity Commission.

Source: RBA Statement of Monetary Policy, August 2025.

It’s about inflation not productivity

Bullock did her best to steer potential headlines away from productivity to the fact that the RBA cut interest rates and is “increasingly confident” about where inflation is heading.

“The news here isn’t productivity. The news here is that this is our third interest rate cut this year, 75 bps, inflation is returning to target, and unemployment is historically low - that is the good news.”

She also addressed the ever-present criticism that the RBA has been too slow in cutting rates.

“Becasue we didn’t take rates as high as other countries, it may be that we don’t need to reduce rates as much either.”

However, you want to attribute credit, unemployment did not stay so low during other recent economic slowdowns (see chart below).

Bullock is right to try to drag the spotlight away from productivity back to the RBA’s enviable stewardship of the Australian economy. 

Australian Private Debt Market

Australia is on track. Inflation and unemployment are low and are expected to stay low. While the RBA has plenty of room to move if the international environment deteriorates. Productivity could be better (and always can) but the RBA is right to leave that to the government.