The Reserve Bank of Australia (RBA) has lowered the official cash rate to 3.6%, its third 25-basis-point cut this year, easing pressure on borrowers but warning Australians to brace for slower long-term growth in living standards.
The decision will trim monthly repayments by about A$300 for households with a typical A$600,000 mortgage when combined with the rate reductions in February and May. It follows last month’s surprise decision to hold rates at 3.85%, which governor Michele Bullock said was a matter of timing rather than a shift in direction.
“With underlying inflation continuing to decline back towards the midpoint of the 2–3 per cent range and labour market conditions easing slightly, as expected, the board judged that a further easing of monetary policy was appropriate,” the RBA board said.
Productivity downgrade
Alongside the rate move, the central bank slashed its long-term “trend” productivity growth assumption from 1% to 0.7% from 2028 onwards, abandoning its long-held view that current weakness would recover. “For some time, our forecasts have implicitly assumed that productivity growth was temporarily weak and would gradually return to, and be sustained at, higher historical rates. More often than not, this has not eventuated,” the RBA said.
The downgrade reflects a decade of stagnant productivity, attributed to subdued business investment, weaker competition, and regulatory burdens. The RBA now expects slower GDP, business investment and household income growth, although weaker productivity will also help cap supply and contain inflation within the 2–3% target band.
Treasurer Jim Chalmers will host an economic reform roundtable in Canberra next week, with business, union and community leaders – including Bullock – set to attend. Productivity policy is expected to be a key topic.
Inflation pressures have eased since the July hold, with the RBA’s preferred trimmed-mean measure falling to 2.7% in the June quarter. Unemployment has edged up to 4.3% but remains historically low and still a potential source of inflation.
Another cut likely in 2025
Markets now expect one more quarter-point cut this year and another in early 2026, which would bring the cash rate to 3.1% – considered the “neutral” level where monetary policy is neither stimulatory nor restrictive. Rates are not expected to return to the ultra-low levels seen during the pandemic.
Economists remain divided on whether more easing will follow quickly.
KPMG chief economist Brendan Rynne described the cut as “a step in the right direction” but added: “The question is whether it will be enough to turn around the anaemic consumption and investment environment currently facing Australian households and businesses, which is dragging down Australia’s economic growth potential. The simple answer is ‘probably not’.”
Rynne said, “Households and investors need ongoing rate relief to spur spending. Another couple of cuts is required to energise our economy again and turn things around.”
Krishna Bhimavarapu, APAC economist at State Street Investment Management, said: “The RBA’s decision to hold rates last month effectively paved the way for today’s rate cut, making it a near certainty. Market expectations now reflect a bias toward limited easing for the rest of the year, as attention shifts to signs of a modest growth pickup in Q2, even though inflation remains within the target band. However, the Bank’s downgrade of 2025 growth rate is at odds with that; we still expect growth to average 1.8% this year. Furthermore, the labor market remains the critical missing piece in this evolving narrative.”
Dwyfor Evans, head of APAC macro strategy at State Street Markets, added: “After surprising markets with an unexpected hold in July, the Reserve Bank of Australia (RBA) cut its cash rate by 25bps to 3.6% on 12 August. Q2 headline CPI likely gave the RBA confirmation that inflation is trending in the right direction and inflation expectations have remained broadly unchanged. Caution was reiterated: the labour market remains tight and the impact of tariffs and fiscal spending compelled the RBA to deliver a message of gradualism on policy.”
Evans noted: “One significant unknown is the RBA’s estimate of the neutral rate and we maintain the view that caution implies that the RBA delivers fewer rate cuts than markets expect – and prefer long AUD exposure as a consequence. We acknowledge though that the RBA remains in data watching mode for now.”
Ivan Colhoun, chief economist at CreditorWatch, called the move “very welcome news for both businesses and households with mortgages, as costs of living and doing business remain very high, while more generally, a less restrictive policy setting will be supportive for economic growth and ensure that any rise in the unemployment rate is minimised.”
He added: “One further interest rate reduction is likely in November this year, unless the unemployment rate begins to rise more quickly.”