To rate cut or not? That is the question

The change in forecast comes after the lower-than-expected monthly inflation result of 2.1 per cent in May.

On 26 June 2025, the Australian Bureau of Statistics’ monthly consumer price index (CPI) indicator has shown that the annual inflation rate has dropped to 2.1 per cent, aligning with the RBA’s target of 2–3 per cent.

The data shows that housing (+2 per cent), food and non-alcoholic beverages (+2.9 per cent), and alcohol and tobacco (+5.9 per) are the main contributors to the annual CPI rise.

New dwelling prices rose by just 0.8 per cent annually, representing the weakest growth since April 2021.

Meanwhile, rents increased by 4.5 per cent, slowing from 5 per cent in April, the lowest rate since December 2022.

Following the latest inflation figures, CBA and Westpac, which both expected the RBA to deliver its next rate cut in August, have now revised their forecasts to July.

ANZ remains the last of the big four banks still expecting a rate cut on 12 August.

Westpac chief economist, Luci Ellis, said the bank has forecast its rate cut for July, but the decision remains uncertain and is not as guaranteed as market sentiment suggests.

“The RBA has sometimes defied market pricing if offshore risks are being overweighted, but now is the time to bring forward a move it knows it will likely make soon anyway.”

“The RBA’s outlook is still shaped by concerns about the tight labour market, slow economywide productivity growth, and the pricing implications of recovering demand. Thus, we expect non-committal, even grudging, language in the post-meeting communication,” Ellis said.

To rate cut or not?

Whether a rate cut will occur in July or August remains a mystery, as the market must wait for the next meeting to conclude.

In May, Reserve Bank governor Michele Bullock said that the board would try to avoid back-to-back cuts and has been favouring quarterly inflation results over monthly CPI figures.

Ellis said that while the May CPI came in lower than anticipated, supporting progress towards the 2.5 per cent inflation target, one month’s data isn’t usually enough to drive RBA decisions.

“This was an explicit steer that the RBA’s thinking in May was that it did not plan to do back-to-back cuts but would wait for the quarterly CPI ahead of its August meeting. And they still might do that, but it is harder to justify now.”

PRD chief economist Dr Diaswati Mardiasmo said that, compared to the 2.4 per cent readings in March and April, the CPI result for May has shown a clear improvement.

Despite the improvement, she said that the RBA has been favouring quarterly figures, which offer a more stable view, while monthly data can be volatile due to short-term influences.

“I wouldn’t be surprised if the RBA decides to hold the cash rate stable and cut in August. Based on that quarterly pattern,” Mardiasmo said.

“But who knows? They might decide to cut the cash rate in a couple of weeks’ time.”

Mortgage broker at Finni Mortgages, Eva Loisance, said the July rate cut has become more likely following inflation cooling off faster than expected.

“I think we can expect it as soon as next Tuesday, if not next month. All indicators are green – inflation, labour market. We also have a weak GDP growth indication, which may justify easing pressure,” Loisance said.

What effects would an additional rate cut have?

Assuming the RBA cuts the cash rate by 0.25 percentage points, borrowers on a $600,000 loan with 25 years remaining could see their monthly repayments drop by $90.

Similarly, owner-occupiers with a $750,000 mortgage could save $113 a month, while those with a $1 million mortgage could see their repayment decrease by $150 a month.

Loisance said that a third rate cut will further amplify demand in the property market.

“We have seen an increased demand in refinances and new buyers who were tight on servicing or simply scared to jump in,” Loisance said.

“Investors’ confidence has increased with improved cash flow. We will certainly see more buyer competition, especially in affordable markets. However, prices are only going north.”

Similarly, Mardiasmo said that a third rate cut will push demand further and will likely give recovering markets, such as Melbourne, the nudge they have been needing to start a growth phase.

“The last rate cut in May did work to oil the wheel of real estate. We saw slightly quicker transactions and higher auction clearance rates in Sydney and Melbourne two weeks post-May cut.

“That said, despite three potential rate cuts, interest rates remain relatively high following 13 hikes, and rising property prices continue to limit overall affordability.”

“Yes you can borrow slightly more money, but the repayments, due to property price increases, would cancel that out. That acts as a bit of a buffer to how fast the markets can move,” Mardiasmo concluded.