RBA cuts rates again, warns of rising threat to pay packets

Further interest rate relief is in the pipeline after the Reserve Bank cut official interest rates for the third time this year, but governor Michele Bullock has warned slowing productivity growth is already hurting people’s hip pockets.

Shortly after the RBA trimmed the cash rate to 3.6 per cent – its lowest level in more than two years – on Tuesday, the nation’s four major banks announced plans to cut their key lending rates by a quarter percentage point. On a $600,000 mortgage, the cut delivers a $100 a month saving.

At a press conference following the decision, Bullock said the board was “fully behind” the decision to cut after its members last month made a 6-3 split decision to keep rates on hold against economists’ expectations.

The bank has three more meetings this year. Financial markets believe a rate cut in September is unlikely, but put the chance of one at its November meeting at 92 per cent. By December, markets are convinced the Reserve will have the cash rate at 3.35 per cent, its lowest point since early 2023.

The RBA also revised down its assumption for the country’s productivity from 1 per cent to 0.7 per cent for the next two years. Next week, Treasurer Jim Chalmers will head the government’s three-day economic roundtable that will examine policies to lift the nation’s economic speed limit.

Bullock warned that weaker productivity growth was already being felt by Australians. “Real wages are not rising by very much because that’s the implication of slow productivity growth … that real wages can’t grow as quickly,” she said.

Bullock said the latest inflation figures, which came in at 2.7 per cent in the year to June, gave the bank the confirmation it needed to make its latest interest rate cut but noted households were still feeling the pain of higher costs.

In its monetary policy statement, the RBA said the jobs market was “still a little bit tight” despite the unemployment rate rising to 4.3 per cent in June, and that it remained cautious about the outlook for the economy.

While it is expecting unemployment to remain steady at about 4.3 per cent for the next two years and household spending to continue to recover, the bank said its latest forecasts suggest price pressures will continue to ease towards the middle of its 2 to 3 per cent target range.

The bank’s forecasts are based on an assumption that interest rates will continue to fall, reaching 2.9 per cent by the end of next year.

Bullock acknowledged that, based on the bank’s forecasts, further cuts in interest rates would mean lower inflation but put more jobs on the line.

The bank acknowledged that uncertainty continued to surround the Australian economy, stemming from both domestic and international developments, but said Australia’s interest rates were “well-placed to respond decisively to international developments”.

The fallout from US President Donald Trump’s tariffs has been widely feared, but the bank said Australia would be broadly unscathed.

“The slowing in overall major trading partner growth is expected to be relatively modest and short-lived,” the bank said, noting it expected economic growth in China – Australia’s largest trading partner – to be relatively resilient.

House values have climbed every month since the RBA started cutting rates in February, with the median value now at a record $1.5 million in Sydney.

Bullock said lower interest rates were likely to support the housing market, adding she wanted to see activity improve across the property sector “in a nice measured way”. But Cotality’s research director Tim Lawless said a strong lift in house prices was unlikely given affordability constraints for most prospective buyers.

Chalmers celebrated the RBA’s decision, saying it would bring welcome relief to millions of people.

“It will put more money in the pockets of people who are under pressure,” he told reporters in Canberra. “For the first time in almost two decades, we’ve seen three interest rate cuts in a calendar year with the unemployment rate still lower than 5 per cent.”

But shadow treasurer Ted O’Brien said the RBA’s downgraded economic forecasts were an indictment of Labor’s economic management.

“This is a vote of no confidence in the government’s economic plan by the RBA,” he said.

KPMG chief economist Brendan Rynne said the bank’s rate cut was a step in the right direction, but more would be needed.

“The question is whether it will be enough to turn around the anaemic consumption and investment environment currently facing Australian households and businesses, which is dragging down Australia’s economic growth potential,” he said. “The simple answer is ‘probably not’.”

Rynne said that while both headline and underlying inflation were within the RBA’s target band, the growing risk to consumer and business confidence remained Trump’s ongoing tariff war.

“Households and investors need ongoing rate relief to spur spending,” he said.

AMP chief economist Shane Oliver said while poor productivity growth had not prevented a slowdown in inflation, it did mean that the outlook for the economy was less bright.

“What it does tell us is that the speed limit for Australian economic growth, wages growth and growth in living standards in Australia is likely now a lot lower than it used to be,” he said.

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