July rate cut almost certain amid tariff spooks for RBA

The Reserve Bank of Australia (RBA) has cut the cash rate twice this year – moves well-received by stretched householders still recovering from the high inflation of the past few years.

Now, another rate cut is on the horizon as the bank moves swiftly as concerns around the United States and China grow.

Markets are almost certain of a cut next month, ascribing anywhere from an 84% chance of a cut (Australian Stock Exchange) to a 97% chance (Westpac).

A 25-basis point cut at the RBA board’s next meeting on 8 July would bring the cash rate down to 3.60% – a level last seen in April 2023.

Room for cut

Q1 national accounts published last week show aggregate GDP had less than half the growth the bank had forecast.

This comes amid concerns the cash rate in Australia should have been cut earlier than February to inject spender confidence.

While high inflation, stable inflation and disinflation have all been part of Australia’s economic history, understanding how the current global environment will translate is near impossible.

Governor Michele Bullock was cautious and conservative at the RBA's last press conference. Picture: News Corp Australia

Following last month’s cash rate cut, governor Michele Bullock said the Australian economy was grappling with “a new set of challenges” and that the tight labour market is the most significant major risk at the moment. 

Slow economic growth, a tight labor market and stagnant productivity in Australia all have a role to play in why housing costs and home loans have been so varied in recent years.

Speaking last week at an Economic Society of Australia event in Brisbane, RBA assistant governor Sarah Hunter said the bank “can’t be completely sure” of the added impact from global pressures.

“The broad-based nature of the proposed US tariffs, retaliation from major partners and other policy shifts all have the potential to structurally alter the world economy,” Ms Hunter said.

“What happens overseas matters for the Australian economy and is therefore a key factor in monetary policy settings.”

'How interest cuts affect the property market': youtube.com/mortgagechoice

Mixed messages

Ms Hunter’s comments are in stark contrast to governor Michele Bullock’s assertions before the first rate cut in February that Australia needed to focus on its own inflation recovery, rather than follow other major economies.

The bank has now developed a framework on its thinking around how uncertainty in international policy and trade could affect the bottom dollar at home.

Key in that are assumptions around how households may continue to respond.

“Until it’s clearer where policy will settle, businesses and households are likely to become (understandably) more cautious,” Ms Hunter said. “There is ample research showing that higher uncertainty can lead to declines in investment, output and employment.”

Mortgage holders and prospective home buyers will also base their spending and saving decisions on broader financial conditions.

With core inflation back within the RBA’s target range of 2-3%, household consumption is expected to creep back up, albeit slower than initial forecasts before the US president Donald Trump’s April introduction of tariff measures.

Two cash rate cuts this year has improved affordability for homeowners. However, consumer spending only rose 0.1% in April, showing Australians are remaining cautious and are in need of more reassurance.

Around 26% of Australian mortgage holders were at risk of mortgage stress between February and April – 1.2 percentage points lower than before rates were cut, Roy Morgan research shows.

As the RBA continues to neutralise and look for growth from the domestic market, another rate cut is likely the push Australians need to get back out and splash the cash.