The Reserve Bank of Australia (RBA) is expected to cut interest rates further next year, but will proceed cautiously. Westpac forecasts a 25 basis point (bp) cut in August, followed by another in November. Two more 25bp cuts are anticipated in early 2026, possibly in February and May.
These cuts could come sooner if inflation and the labor market show weaker signs by late 2025. This series of cuts would bring the RBA cash rate down to 2.85% from its current 3.85%, which is considered to be at the lower end of the neutral range. The cuts are deemed necessary due to the lower inflation outlook.
Financial markets are increasingly confident that the RBA will announce another rate cut, potentially providing homeowners with significant monthly savings. If the RBA were to cut rates by 0.25%, homeowners with a 30-year $600,000 loan at a 6% interest rate could save approximately $82 per month. Combined with previous cuts this year, the total savings would be about $250 per month.
RBA’s cautious rate cut strategy
The discussion of rate cuts arises in the context of recent economic data showing underwhelming growth. The Australian Bureau of Statistics (ABS) revealed that economic activity increased by just 0.2% in the March quarter, down from 0.6% in the December quarter.
Consumer spending rose by only 0.1% in April, while employment numbers dropped 0.2% to 16.3 million jobs in the same quarter. Economists believe that slashing the cash rate could potentially boost consumer spending and stimulate economic growth. While August had been considered the most likely time for a rate cut, recent data have made July a “live” option.
AMP chief economist Shane Oliver predicted ongoing mortgage relief until Australia’s economic activity shows significant improvement. “It’s looking increasingly likely we will get a July cut,” he said. “Our base case had been August, November, and then February for cuts.
But what these numbers are telling us is that it could come earlier and rates could go lower.”
According to various forecasts, there could be two to three more rate cuts this year, potentially bringing the cash rate down to 3.10% by the end of 2025. The RBA’s actions will be closely monitored as they navigate the economic landscape and work to support stability and growth.
