Reserve Bank of Australia Lowers Cash Rate to 3.60 Percent
The Reserve Bank of Australia cut its benchmark interest rate by 25 basis points to 3.60 percent Tuesday, marking the third reduction this year as inflation continues to fall toward the central bank's target range.
The unanimous decision by the Monetary Policy Board brings the total decline in the cash rate to 75 basis points since the beginning of 2025, as policymakers respond to moderating price pressures and slightly easing labor market conditions.
"With underlying inflation continuing to decline back towards the midpoint of the 2–3 percent range and labour market conditions easing slightly, as expected, the Board judged that a further easing of monetary policy was appropriate," the central bank said in its policy statement.
Inflation has fallen substantially from its 2022 peak as higher interest rates worked to balance demand and supply in the economy. Trimmed mean inflation dropped to 2.7 percent in the June quarter, while headline inflation reached 2.1 percent, both figures meeting the bank's May forecasts.
The central bank said updated staff forecasts suggest underlying inflation will continue moderating toward the midpoint of the 2-3 percent target range, assuming the cash rate follows a gradual easing path.
"Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and potential supply closer towards balance," the statement said.
The unemployment rate rose to 4.3 percent in June and averaged 4.2 percent for the entire June quarter, matching the bank's May projections. Despite the increase, labor market conditions remain relatively tight, with measures of underutilization staying at low levels.
"Various indicators suggest that labour market conditions remain a little tight, although have eased further in recent months," according to the statement. "Measures of labour underutilisation nevertheless remain at low rates and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers."
Wages growth has eased from its peak, but productivity growth has not improved, keeping unit labor costs elevated. The central bank noted that "growth in unit labour costs remains high" despite some moderation in wage pressures.
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The policy decision comes amid continued global economic uncertainty, though the bank noted "a little more clarity on the scope and scale of US tariffs and policy responses in other countries, suggesting that more extreme outcomes are likely to be avoided."
Trade policy developments are still expected to adversely affect global economic activity, with risks that households and businesses may delay spending while awaiting greater clarity on the economic outlook.
"Trade policy developments are nevertheless still expected to have an adverse effect on global economic activity, and there remains a risk that households and firms delay expenditure pending still greater clarity on the outlook," the statement said.
Domestically, private demand appears to be recovering gradually, with real household incomes rising and some financial conditions easing. The bank's forecasts anticipate sustained recovery in household consumption growth as real incomes continue to increase.
However, businesses in some sectors report that weak demand makes it difficult to pass cost increases to consumers. This dynamic creates uncertainty about future price pressures and economic growth.
"Businesses in some sectors, however, continue to report that weakness in demand is making it difficult to pass on cost increases to final prices," the central bank said.
The bank identified several risks to its economic outlook. Consumption growth could prove slower than expected, potentially weighing on aggregate demand and leading to weaker labor market conditions. Alternatively, rising real incomes and wealth might prompt households to consume more and save less than anticipated.
Labor market outcomes may also exceed expectations, given signals from various leading indicators. The bank acknowledged uncertainty about how quickly recent monetary policy changes will affect the economy and how businesses will adjust pricing and wage decisions.
"There are also uncertainties regarding the lags in the effect of recent monetary policy easing and how firms' pricing decisions and wages will respond to the balance between aggregate demand and potential supply for goods and services," the statement noted.
Despite the rate reduction, the central bank emphasized its continued caution about the economic outlook, particularly given heightened uncertainty about both demand and supply conditions.
"The Board nevertheless remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and potential supply," the statement said.
The bank indicated monetary policy is positioned to respond decisively to international developments that could materially affect Australian economic activity and inflation.
"It noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia," according to the statement.
The Monetary Policy Board committed to monitoring economic data and evolving risk assessments to guide future decisions. The bank will pay close attention to global economic and financial market developments, domestic demand trends, and outlooks for inflation and employment.
"The Board will be attentive to the data and the evolving assessment of risks to guide its decisions," the statement said. "In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market."
The central bank reaffirmed its mandate to deliver price stability and full employment, pledging to take necessary actions to achieve those objectives.
"The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome," the statement concluded.
The rate reduction reflects the bank's assessment that economic conditions warrant continued monetary policy support as inflation pressures ease and labor markets show signs of modest cooling. The unanimous decision suggests broad agreement among board members about the appropriate policy response to current economic conditions.
The gradual approach to rate cuts indicates the bank's preference for measured policy adjustments rather than aggressive moves, allowing time to assess the effects of previous decisions on economic activity and price pressures.
Financial markets had widely expected the rate reduction following recent economic data showing continued disinflation and some softening in labor market tightness. The bank's communication suggests further rate cuts remain possible if economic conditions continue evolving as anticipated.
The central bank's emphasis on data dependency and risk assessment indicates future policy decisions will be guided by incoming economic information rather than predetermined schedules. This approach allows flexibility to respond to changing economic conditions while maintaining focus on the bank's dual mandate.
Tuesday's decision represents the latest step in the bank's gradual shift from restrictive to more accommodative monetary policy as inflation pressures continue moderating toward target levels and economic growth shows signs of slowing from previous peaks.
The bank's continued focus on both domestic and international factors reflects the interconnected nature of modern economies and the importance of global developments for Australian economic outcomes. Trade policy uncertainties remain a key consideration for future monetary policy decisions.
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