RBA Cuts Interest Rate by 25 Basis Points, Forecasts 1.7% GDP Growth for 2025

The Reserve Bank of Australia (RBA) has continued its easing cycle by announcing a third interest rate cut this year, reducing the benchmark interest rate by 25 basis points to 3.6%, the lowest level since April 2023. This decision aligns with market expectations and marks the third reduction in the current easing cycle, bringing the total cut to 75 basis points. The RBA's move is part of a broader strategy to stimulate economic growth amid a challenging global economic environment. The central bank has significantly lowered its economic forecasts, indicating a more pessimistic outlook for the near future. This adjustment reflects concerns over slowing economic activity and the need for further monetary support to bolster growth.

The RBA's decision to continue its easing cycle suggests that the central bank believes there is still room for further rate cuts, potentially up to 80 basis points over the next year. This approach aims to provide additional support to the economy, which has been facing headwinds from various factors, including global trade tensions and domestic economic challenges. The RBA's actions are part of a broader trend among central banks worldwide, which are increasingly adopting accommodative monetary policies to counter economic slowdowns and support growth. The RBA's decision to lower interest rates and adjust its economic forecasts underscores the central bank's commitment to maintaining economic stability and promoting growth. The move is expected to have a positive impact on various sectors of the economy, including housing, consumer spending, and business investment. However, it also raises concerns about potential inflationary pressures and the long-term sustainability of the current monetary policy stance.

The RBA's decision to continue its easing cycle reflects a cautious approach to managing the economy, balancing the need for growth with the risks of overstimulation. The central bank's actions are closely watched by markets and policymakers alike, as they provide insights into the broader economic outlook and the potential for further policy adjustments. The RBA's decision to lower interest rates and adjust its economic forecasts is a significant development in the global economic landscape, highlighting the challenges and opportunities facing central banks as they navigate a complex and uncertain economic environment.

In the accompanying quarterly monetary policy statement, the RBA painted a more grim economic picture. The central bank significantly lowered its economic growth projections, reducing the 2025 GDP growth forecast from 2.1% in May to 1.7%. Additionally, the RBA lowered its long-term productivity growth assumption from 1.0% to 0.7%, indicating that Australia's economic potential growth rate has decreased from 2.25% to 2.0%. This change reflects the poor productivity performance of most developed economies over the past decade and may lead to slower growth in living standards and income. The report attributed the downward revision of growth expectations to weaker-than-expected public demand growth in early 2025.

However, the report also highlighted a positive aspect. Driven by rising house prices, lower borrowing costs, and regulatory easing, residential construction is expected to become a positive factor in the economy. The RBA Chairman stated that so far, residential investment has been gradually recovering and hopes that house prices will rise in a good and moderate manner.

The RBA's confidence in this rate cut is partly due to the continued easing of inflationary pressures. The central bank's closely monitored quarterly core inflation indicator has fallen to 2.7%, nearing the midpoint of its 2%-3% target range, providing space for monetary policy easing. However, the labor market has sent mixed signals. On the one hand, Australia's unemployment rate in June rose to 4.3%, the highest level in four years, indicating initial signs of market cooling. On the other hand, the RBA's forecast shows that the unemployment rate is expected to remain stable at 4.3% until the end of 2027, indicating that the labor market will not experience significant easing. This situation of tightness and weakness coexisting increases the complexity of policy-making.

Despite the RBA's official cautious stance, emphasizing that future actions will be "data-dependent," the market generally believes that this is just the beginning of a new round of easing. The RBA's latest forecast is based on market pricing, assuming that interest rates will fall by a total of 80 basis points over the next year, bringing the rate to a range of 2.85% to 3.1%. Institutional forecasts are more aggressive. Economists believe that the RBA needs to take bolder action than its own assumptions and predict that there is room for a 100 basis point rate cut over the next 12 months. However, the RBA Chairman has also emphasized that given that Australia did not raise interest rates as aggressively as other countries during the 2022-23 rate hike cycle, the extent of its rate cuts may not need to match global peers.