RBA expected to ease in August after this week's surprise pause: Reuters poll

The Reserve Bank of Australia (RBA) unexpectedly paused interest rate cuts this week, holding the cash rate steady for the second time this year and wrong-footing markets. Despite this, a Reuters poll indicates economists largely anticipate the RBA will cut rates by 25 basis points in August to 3.60%, followed by another cut next quarter, as the central bank awaits confirmation that inflation is sustainably heading towards its target. While the pace of easing is now expected to be more gradual than previously forecast, most economists still project further cuts to 3.35% by end-2025, signaling a continued, albeit cautious, path to lower rates.

Analysis

The Reserve Bank of Australia (RBA) has signaled a more cautious and data-dependent approach to its easing cycle by unexpectedly holding its cash rate steady in July, a move that contradicted market expectations. Despite this pause, a Reuters poll indicates a strong consensus among economists, including all four major Australian banks, for a 25 basis point rate cut to 3.60% in August. This forecast is contingent on the upcoming second-quarter inflation data confirming a sustainable path toward the RBA's 2-3% target range. While the overarching direction of monetary policy remains dovish, the timeline for future cuts has been extended. Median forecasts now project the cash rate will reach 3.10% by the end of March 2026, a more gradual pace than the end-2025 timeline anticipated just a week prior. This shift, as articulated by economists from BlackRock and AMP, suggests that while rates are still considered restrictive and will likely move lower, the central bank will proceed with caution, reducing the probability of consecutive monthly cuts.

Key Decisions for Investors

• Investors should closely monitor Australia's upcoming Q2 inflation data, as a report showing inflation within the target range will be the primary catalyst for the widely expected August rate cut.
• Given the RBA's demonstrated willingness to diverge from market expectations, consider positioning for a more gradual easing cycle, which may temper the pace of appreciation in Australian fixed income assets compared to previous forecasts.
• The primary risk to the dovish consensus is an unexpectedly high inflation reading, which could force the RBA to extend its pause, leading to a significant repricing of rate cut expectations and potential downside for rate-sensitive equities and the Australian dollar.