RBA Rate Cuts. Caution Rather Than Celebration

Yesterday, 12 August, the Reserve Bank of Australia cut the cash rate by 0.25 percentage points, reducing it from 3.85% to 3.60%. This decision followed the Australian Bureau of Statistics’ latest quarterly inflation update at the end of July, which showed annual inflation easing from 2.4% in the previous quarter to 2.1%. With inflation now within the RBA’s target range, the slowdown gave policymakers room to lower rates without risking renewed price pressures.

Whilst headlines are reassuring, the real story is more complicated, and something that economists, policymakers and credit analysts will be monitoring closely, as well as everyday Australians.

Trimmed But Still Elevated

Yesterday’s update sits within RBA’s 2%-3% target range. At face value, this is positive - the RBA’s extended period of monetary tightening is starting to deliver the desired effect, bringing relief to households and businesses. Major banks have confirmed they will pass on the rate cut, although most borrowers will need to wait around two weeks for the adjustment to take effect. When you look into the small details, other stories play a role.

What’s Behind the Drop in Headline Inflation?

Falling inflation rates are only one piece of the puzzle. The drop in transport prices, notably fuel, was the key driver, with petrol prices seeing a decrease of 10% over the year. This brought a significant cost relief, but price rises in other sectors have offset much of these savings:

• Housing saw an increase of +1.2% driven by rent and new dwelling
• Health saw an increase of +1.5% due to rising insurance and medical service costs
• Food saw an increase of +1% due to ongoing supply chain and production cost pressures

The risk is that if fuel prices rise again, or if supply-side constraints persist, headline inflation could rise again.

The Labour Market

Unemployment rose to 4.3% in the June quarter and remained steady after yesterday’s update. This could have put pressure on the RBA to ease monetary policy, as a loosening labour market often translates to:

• Slower wage growth
• Reduced consumer confidence
• Greater financial vulnerability among lower-income borrowers

If unemployment continues to drift higher into the second half of the year, it would strengthen the case for interest rates to come down sooner than previously expected.

GDP Growth Misses Expectations

While GDP isn’t a direct input into the RBA’s monetary policy decisions, it’s still an important bellwether of broader economic strength. The March quarter GDP figures showed growth of just 0.2% – half of the 0.4% that many economists had forecast. This underperformance can be attributed to sluggish export performance, a trend that appears to be continuing. There is evidence of a deteriorating global demand and commodity pricing, as highlighted by the 16% drop in half yearly profit reported by Rio Tinto – the worst half-year result in five years.

Signs of Economic Fragility

Cooling inflation, a weakened labour market and sluggish growth. Taking this all into account, I believe that there is a credible case for further rate cuts over the next 6-12 months, which is also being felt more broadly, with financial markets increasing pricing in multiple rate cuts across 2025 and early 2026.

As a positive, this will support housing demand, especially amongst first home buyers, and refinancing activity may pick up as borrowers look to lock in better terms. We could also see business credit demand lift in sectors tied to construction or capex.

On the other hand, higher unemployment rates could increase the likelihood of arrears and delinquencies. Stagnant wages may pressure consumer credit, and export-dependent industries could see a rise in credit stress due to lower revenues.

Overall, yesterday’s drop is a positive for most as easing inflation is good news, but we shouldn’t lose sight of the broader fragility in the economy. For those who monitor credit quality, borrower behaviour and sector-specific trends, now is a time for caution rather than celebration. If the RBA pivots to a rate-cutting cycle, it will bring some relief, but it also raises important questions about how borrowers and industries will respond in an uncertain macro environment.

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