Inflation is slowing and fears of another interest rate hike have eased. But does that mean borrowers can expect a rate cut at the Reserve Bank of Australia's (RBA) next meeting on 11 August?
Will the RBA cut interest rates in August?
According to experts, a rate cut in the August 11 RBA meeting is unlikely. The latest inflation figures have significantly reduced the chances of another rate hike, but they're unlikely to be enough for the RBA to start cutting interest rates just yet.
Australia's annual inflation rate eased to 3.8% in the June quarter, down from 4.0% in the March quarter. The RBA's preferred measure of underlying inflation, known as the trimmed mean, also eased to 3.6%. While both figures came in lower than expected, they're still above the central bank's 2% to 3% inflation target.
That's why most economists and the big four banks expect the RBA to leave the cash rate unchanged at 4.35% when its Board meets on 11 August.
The focus has now shifted from whether rates need to rise again to how long they'll need to stay high before the RBA is comfortable cutting them.
When are the Big 4 banks predicting?
The big four banks agree on one thing: they don't expect the RBA to cut interest rates at its August meeting. All four banks expect the cash rate to remain at 4.35% for the rest of 2026. However, they differ on when the first rate cut is likely to happen in 2027.
- Commonwealth Bank (CBA): Expects the first rate cut in May 2027.
- NAB: Expects two rate cuts Q2 2027 onwards.
- Westpac: Expects the first rate cut in August 2027.
- ANZ: Also expects the first rate cut in Q3 2027.
The message for borrowers is simple: don't wait for a rate cut before reviewing your home loan. Compare your options to check if you are paying more than you need to, and consider giving yourself a rate cut if you find a better deal elsewhere.
What's stopping the RBA from cutting interest rates?
Inflation may be moving in the right direction, but it's not the only factor influencing the RBA's decision.
The central bank also keeps a close eye on the labour market, wage growth, consumer spending and broader economic conditions. Together, these indicators help determine whether inflation is likely to continue easing or remain stubbornly high.
Inflation is still above the RBA's target
The latest figures showed headline inflation slowed to 3.8%, while underlying inflation, measured by the trimmed mean, eased to 3.6%. Although both measures were lower than expected, they remain above the RBA's 2% to 3% target range.
The RBA has repeatedly said it wants to be confident inflation is returning to target on a sustainable basis before lowering interest rates.
The labour market remains resilient
Australia's unemployment rate remains relatively low, suggesting the labour market is still holding up despite higher interest rates.
A strong jobs market usually means households continue spending and businesses face pressure to increase wages. While that's good news for workers, it can also make it harder for inflation to return to target.
If unemployment starts rising or hiring slows more noticeably, it could strengthen the case for future rate cuts.
Consumer spending is holding up
The RBA is also watching how households respond to higher borrowing costs.
If consumers continue spending despite higher interest rates, inflationary pressures could persist. On the other hand, weaker retail spending and slower economic growth would suggest higher interest rates are having the desired effect, increasing the likelihood of future rate cuts.
When could the RBA start cutting interest rates?
Most economists expect the first rate cut won't come until 2027, but the timing will ultimately depend on how Australia's economy performs over the coming months.
A combination of lower inflation, rising unemployment, weaker consumer spending and slower wage growth could strengthen the case for a rate cut. On the other hand, if inflation remains stubbornly high or the labour market stays strong, the RBA may decide to keep interest rates higher for longer.
Before making its decision, the RBA will be closely watching:
- Inflation: Is price growth continuing to move towards the 2% to 3% target range?
- Unemployment: Is the labour market starting to soften, or are employers continuing to hire?
- Wages growth: Are wage increases adding to inflationary pressures?
- Consumer spending: Are households cutting back as higher interest rates continue to affect budgets?
- Global developments: Oil prices, geopolitical tensions and overseas central bank decisions could all influence Australia's inflation outlook.
While borrowers can't control when the RBA cuts interest rates, they can control whether they're paying a competitive rate today. If you haven't reviewed your home loan recently, a free home loan health check can help you understand whether you're getting a competitive deal or if you could save by switching lenders.
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