RBA cuts as expected, hints at more interest rate relief

In a move that was widely expected, the Reserve Bank of Australia has cut the nation’s cash rate by 25 basis points to 3.6%, following its August board meeting. 

It’s the third time the RBA has cut rates since it began an easing cycle in February this year.

Several major banks, including the Commonwealth Bank, Westpac and Macquarie Bank, have responded quickly by saying they will pass on the interest rate reduction in full to retail customers on variable rate mortgages.

The RBA’s move was warmly welcomed by the Federal Treasurer, Jim Chalmers, who said it would be “welcome relief for millions of Australians,” putting “more money in the pockets of people who are under pressure.”

The details

The RBA’s decision to cut the cash rate from 3.85% to 3.6% in August follows the bank’s controversial July decision to keep rates on hold, despite monthly figures showing inflation was falling.

Then, 3 members of the RBA’s 9 member rate-steering committee voted to cut, but were overruled by the majority.

This time, the media release which accompanied the rate announcement says the decision to cut was unanimous.

“With underlying inflation continuing to decline back towards the midpoint of the 2–3% range and labour market conditions easing slightly, as expected, the Board judged that a further easing of monetary policy was appropriate,” it states.

And although the bank’s media release spells out both external and domestic threats to that moderating inflation outlook in detail, it also hints that more interest rate cuts are likely.

“Updated staff forecasts for the August meeting suggest that underlying inflation will continue to moderate to around the midpoint of the 2–3% range, with the cash rate assumed to follow a gradual easing path,” it says.

The “staff forecasts” the bank’s media release refers to are contained in the RBA’s latest Statement of Monetary Policy document, which actually assumes “trimmed mean” or core inflation will remain remarkably stable in Australia over the next two-and-a-half years at around 2.6%.

The “assumptions” about interest rates would therefore see a cash rate of 3.4% in December 2025, falling to 3.1% by June next year and bottoming out at 2.9% in December 2026 before lifting to 3.1% by the end of 2027.

EY Oceania’s Chief Economist, Cherelle Murphy, says she believes the RBA may cut rates up to 3 more times - probably at 25 basis points each time - until the cash rate reaches a “neutral’ rate.

“I think at least one, maybe two, could even be three, more 25 basis point cuts before they're (the RBA are) done,” she says. 

“Of course, this depends very much on where the economy goes from here, what those international conditions look like, and particularly what the consumer does in relation to what's been delivered today.”

However, at her post rate-decision press conference, RBA Governor Michele Bullock was keen to sound a note of caution about further rate cuts.

"Because we didn't take rates as high as some other countries, it may be that we don't need to reduce rates as much either," she said.

Housing 

Eleanor Creagh, the Senior Economist at REA Group, says the RBA’s rate cut will “bolster both buyer confidence and borrowing capacity, supporting housing demand and price growth.” 

“While affordability remains severely constrained, the underlying market pressure of persistent housing undersupply relative to population growth remains in place.

“We expect home prices to continue rising in the months ahead,” she says, “albeit at a more moderate pace than seen in previous easing cycles.” 

Cotality’s Research Director, Tim Lawless, describes the cut as a “net positive for housing markets, supporting demand through increased borrowing capacity and loan serviceability, and is likely to provide a boost to confidence.” 

“Overall, we expect housing markets to respond positively to the rate drop, which is occurring against a backdrop of low supply.

“However, stretched housing affordability and prudent lending standards are likely to temper the upswing,” he says.

Independent housing analyst Cameron Kusher describes the rate cut as a “game-changer, acting as a shot in the arm for a (property) market that's been waiting for a signal.”

“I believe this reduction in the cash rate is likely to encourage more vendors to list their homes for sale during Spring and increase the number of buyers over the coming months.”

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My view

The RBA’s decision to cut the cash rate is welcome news - but it’s worth remembering that this is only part of the story for stressed mortgage holders; just because the central bank has cut by 25 basis points doesn’t mean all retail banks are going to play ball.  

While CBA, Westpac and Macquarie Bank were quick out of the blocks to announce cuts to variable rates, in the past week, National Australia Bank went out ahead of the central bank and cut fixed-term rates by a whole 0.25%, taking its two-year-fixed rate down to a market-leading 5.19%.

At the same time, ANZ Bank increased the rate on its ANZ Plus variable home loan for new customers by 0.16% to 5.75% and ended cashbacks for households who refinance. 

This is a good reminder that retail mortgage rates aren't just automatically tied to the RBA cash rate.

If you have a mortgage, it’s worth remembering your lender can move independently at any time.

That’s why you shouldn’t “set-and-forget” your loans - you need a good finance team around you, whether you are an owner-occupier or a property investor. 

Even if you have a good deal now, keep reviewing it or have a team that will constantly review it for you. 

At Freedom, our property strategists and lending teams work constantly with our 10,000 members to make sure they are getting access to the best financing deals, as well as the best investment-grade properties.