RBA expected to cut rates for third time on July 8 as economy slows: Reuters poll

A Reuters poll indicates the Reserve Bank of Australia is poised for a third 25 basis point rate cut on July 8, lowering its cash rate to 3.60%, as easing inflation and a slowing economy prompt a more aggressive easing cycle than previously anticipated. Economists now project five RBA rate cuts this year, with over 60% expecting a further quarter-point reduction this quarter, aiming to bolster growth amidst softer consumption. This outlook contrasts with the Australian dollar's year-to-date strength, largely driven by broad U.S. dollar weakness.

Analysis

A significant dovish shift in monetary policy expectations for the Reserve Bank of Australia is underway, with a Reuters poll showing a strong consensus (31 of 37 economists) for a 25 basis point rate cut to 3.60% on July 8. This acceleration in the easing cycle, now projecting five cuts this year versus three previously, is underpinned by tangible economic data: inflation has cooled to 2.1% in May and Q1 2025 GDP growth slowed sharply to 0.2%. The primary driver for this pivot is weaker-than-anticipated domestic consumption, compelling the RBA to prioritize growth support. While the market anticipates further cuts this quarter to a rate of 3.35%, significant uncertainty clouds the outlook for 2025, with economists and Australia's major banks split on the terminal rate. This domestic weakness and dovish policy stance contrast sharply with the Australian dollar's performance, which has appreciated over 6% year-to-date due to broad U.S. dollar weakness. Downside risks, such as potential U.S. tariffs, could prompt even more aggressive RBA action by suppressing household savings and consumption further.

Key Decisions for Investors

• Fixed income investors should anticipate continued downward pressure on Australian yields, as consensus points to further rate cuts with a median year-end cash rate forecast of 3.10%.
• Monitor consumer consumption data and US trade policy developments closely, as these are the key identified catalysts that could trigger a more aggressive easing path from the RBA.
• Be aware of the notable divergence between the RBA's dovish policy trajectory and the Australian dollar's strength, which is currently tethered to external USD weakness and could be a source of volatility.
• Given the lack of consensus among major banks on the 2025 terminal rate, it is prudent to maintain portfolio flexibility and hedge against multiple interest rate scenarios rather than committing to a single outcome.