Reserve Bank of Australia cuts rates, signals a steady easing bias

Summary

• The Reserve Bank of Australia (RBA) delivered a widely expected 25 bps rate cut at this week's monetary policy meeting, lowering the Cash Rate to 3.60%, marking its third rate cut this year. The decision was unanimous and the accompanying statement struck a neutral tone, though perhaps leaning slightly dovish on the margin. The central bank remains on a steady easing path, without signaling any particular urgency regarding adjustments to its policy stance.

• The RBA downgraded its GDP growth outlook due to persistently weak productivity, while inflation and unemployment forecasts were left broadly unchanged. Governor Michelle Bullock reiterated that Australia’s shallower hiking cycle means it may not need to cut rates as deeply as other advanced economies.

• Recent labor market and wage data, in our view, support the RBA’s cautious stance. July’s jobs report showed a strong rise in full-time employment and a drop in underemployment, while Q2 wage growth unexpectedly held steady at 3.4% year-over-year.

• Uncertainties surrounding weak productivity and the dynamics of elevated labor costs remain an important area of focus for the RBA. Against this backdrop, we think that the central bank is likely to wait for confirming evidence of improving productivity and moderating wages before contemplating a faster pace of monetary easing. With those improving productivity and costs likely to reveal themselves only gradually over time, we view a continued quarterly cadence of rate cuts as more probable. As a result, our base case remains for further 25 bps cuts in November and February, bringing the Cash Rate to 3.10% by early 2026, with risks tilted slightly toward an even slower pace of easing.

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