ISCOVER
The market widely expects the central bank to lower rates by 25 basis points this week.
Banks are near-unanimously forecasting the Reserve Bank of Australia (RBA) to lower the cash rate when its board meets later this week.
A 25-bp cut, which would lower interest rates from 3.85 per cent to 3.60 per cent, is the most common forecast for the RBA’s monetary policy decision, which will be announced on Tuesday (12 August).
In its minutes for the July meeting, the RBA outlined that its decision to leave the cash rate unchanged was consistent with its strategy of easing monetary policy in a “cautious and gradual manner” to achieve the board’s inflation and employment targets.
The board decided by majority (six in favour, three against) to leave the cash rate target unchanged at 3.85 per cent on 8 July.
25-bp cut a ‘straight-forward decision’
Commonwealth Bank of Australia (CBA) is forecasting the RBA to cut the cash rate by 25 bps to 3.60 per cent on Tuesday in what would be its third interest rate drop of the cycle.
The major noted that markets are fully priced with around a 100 per cent implied probability that the rate will drop by 25 bps, supported by second quarter inflation data.
CBA senior economist Belinda Allen described a 25-bp cut as a “straight-forward decision” and expects another rate cut in November.
Looking further ahead, she said: “The chance of a further rate cut in early 2026 (to take the cash rate to 3.10 per cent) is building. Our read on the inflation pulse indicates the chance of trimmed mean CPI moving below the mid-point of the 2.5 per cent target is growing due to the sluggish economic recovery and the underlying inflation components.”
Fellow big four bank Westpac is forecasting 100 bps of rate cuts beginning at this week’s August RBA meeting through May 2026 to a neutral terminal cash rate of 2.85 per cent.
That includes a 25-bp cut at its August meeting, followed by cuts in November, February 2026, and May 2026, looking “increasingly likely”.
Westpac chief economist Luci Ellis commented that she believes the RBA “now has the confirmation it needs to continue on its ‘cautious’ – if not so predictable last month – path of removing current monetary restrictiveness.”
Australia and New Zealand Banking Group Limited (ANZ) economists also expect a 25-bp rate cut this week.
The bank’s head of Australian economics, Adam Boyton, said: “The no change in July showed that the board does not see itself as under pressure to cut the cash rate rapidly. We therefore expect a variation of the ‘cautious and gradual’ approach to be reflected in the August post-meeting statement and the tone of Governor Bullock’s press conference.”
The major is also forecasting a follow-up cut in November, with the cash rate to then stay at 3.35 per cent for an “extended period”.
National Australia Bank (NAB) also expects a 25-bp cut this week, with its economics team highlighting that quarterly inflation data “gave a green light” to an August rate cut, though the details suggested “some caution should remain”.
The big four bank continues to see the RBA cutting rates in August, November, and February, bringing the cash rate down to 3.10 per cent, which it views as “broadly neutral”.
Potential for a sharper rate drop
Bendigo Bank’s chief economist David Robertson did not rule out a larger rate drop and said there was a “compelling case” for a cut of at least 25 bps.
“With a recent jump in unemployment and inflation continuing to recede, the case for the RBA cutting rates with more urgency is building”, Robertson said, and a 35-bp cut – rather than the standard 25-bp cuts – would be a “neat compromise”.
“The decision on August 12 appears to be just a matter of how large a cut will be delivered.”
Mark Stevenson, managing director at brokerage Bell Partners Finance, did not rule out the possibility of a 50-bp cut.
“The RBA would be justified in lowering rates by half a percentage point because they probably should have delivered a 25-basis point cut last month,” he said.
“Given the RBA’s so-far cautious approach it would be no surprise to see a 25-basis point reduction announced on Tuesday, which would lower the cash rate to 3.6 per cent. That will be a welcome relief for mortgage holders, and they could also be hopeful of another reduction in November.”
[Related: Underlying inflation eases to boost case for rate cut]
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