RBA: Rates Down, Confidence Up?

The Reserve Bank of Australia (RBA) has taken the widely anticipated step of cutting the cash rate by 25 basis points, bringing it down to 3.85% from 4.10%. This move aligns with our call following trimmed mean inflation breaching the target range in 1Q25 while headline inflation printed 2.4% consecutively for the second time.

With underlying inflation expected to remain around the midpoint of the target band, the Bank now sees price pressures as largely contained. At the same time, external uncertainties—from volatile global markets and shifting trade policies to elevated geopolitical tensions—are clouding the outlook and expected to weigh on global and domestic economic activity.

Domestically, while real incomes have improved and financial stress has eased, household spending is picking up more slowly than anticipated, and businesses in some sectors remain unable to pass on rising costs—pointing to lingering demand weakness. The labour market remains tight, but wages growth has softened, and productivity remains subdued, keeping unit labour costs elevated. Against this backdrop, the RBA judged that the risks to inflation have become more balanced, while risks to growth and employment are tilted to the downside. The rate cut aims to make policy slightly less restrictive without undermining the central bank’s inflation mandate, providing scope to respond flexibly if global or domestic conditions deteriorate further.

We maintain our view that the RBA will deliver two further 25 basis point cuts—one in August and another in November—bringing the cash rate to 3.35% by year-end.

Implication For The Business Community

Today’s monetary easing as well as shift in the RBA’s stance is particularly noteworthy given Australia’s ongoing productivity challenges. The rate cut offers immediate relief through lower borrowing costs, but its potential impact goes further. By easing financial constraints, it may help address capital shallowing—the persistent underinvestment in the tools, technologies and infrastructure that drive output. Many of our clients report that rising unit labour costs are being felt more acutely in the context of weak productivity, reinforcing the need for targeted investment to enhance efficiency and competitiveness.

Depressed business investment not only slows economic output but also threatens sustainable wage growth and improved living standards. Until now, a combination of tight monetary policy and global economic shocks have created a difficult operating environment for many firms, making this policy shift a welcome development. While lower interest rates can theoretically encourage investment by reducing the cost of capital, the actual impact depends on a range of factors including business confidence, expected returns, and the broader regulatory landscape. Ultimately, while the rate cut provides welcome breathing space, reversing the productivity decline will require coordinated action across fiscal, structural, and regulatory policy settings.

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