Interest Rate Forecast

In my humble opinion the RBA has been too conservative and should have cut rates earlier. I have them odds on for a 25-basis point reduction tomorrow with a further 25-basis point cut in November.

My expectation is that they will then sit back until March 2026 before making any additional adjustments as they wait for spending to normalise after the festive season.

Last 12 Months

As of August 11, 2025, the current cash rate stands at 3.85%, a level it has held since July 9, 2025, following a series of reductions earlier in the year. This rate reflects the RBA’s ongoing efforts to balance inflation control with economic growth amid a softening domestic and global outlook.

 Over the past year, the RBA has shifted from a prolonged holding pattern to gradual easing. The rate was cut by 25-basis points to 4.10% in February 2025, marking the first reduction in over a year, and further lowered to 3.85% in May 2025. These moves came as inflation cooled toward the RBA’s 2-3% target band, with the latest figures showing annual inflation at 2.1% in July 2025. Looking ahead to the next 12 months, economists and market participants anticipate further fluctuations, primarily in the form of rate cuts, as the economy navigates subdued growth and persistent uncertainties.

Current Economic Climate

Australia’s economy has shown signs of slowdown in 2025, with GDP growth forecasted at a modest 1.6% for the year, improving slightly to 2.3% in 2026. This tempered expansion is attributed to factors such as high household debt, weakening consumer spending, and external pressures like global trade tensions and commodity price volatility. Inflation, which peaked above 7% in 2022, has steadily declined, providing the RBA with room to ease monetary policy without reigniting price pressures.

The labor market remains resilient but is softening, with unemployment edging higher. Meanwhile, the housing sector, which is sensitive to interest rate change, has seen property prices stabilise and begin to rise in anticipation of lower rates, potentially exacerbating affordability issues. Globally, synchronized rate cuts by major central banks, including the U.S. Federal Reserve and the European Central Bank, are influencing the RBA’s decisions, as Australia seeks to maintain currency stability and export competitiveness.

Next 12 Months

Economists widely expect the RBA to continue its easing cycle, with the next policy decision on August 12, 2025, poised to deliver a 25-basis point cut, lowering the cash rate to 3.60%. This move is seen as a “done deal” by major banks like the Commonwealth Bank of Australia (CBA), driven by recent data showing inflation within target and economic activity cooling. 

Following the August cut, consensus forecasts point to another 25-basis point reduction in November 2025, bringing the rate to 3.35%. This would mark the third cut of 2025, providing relief to mortgage holders and stimulating borrowing.

Into early 2026, further easing is anticipated, with many predictions converging on a rate of around 3.10% by February or March 2026, equivalent to an additional 25-basis point cut. Westpac economists foresee two more cuts in the first half of 2026, while CBA notes a “chance” of an early-year reduction if inflation trends remain favorable. By mid-2026, some longer-term models project the rate stabilising near 2.85%-3.00%, assuming no major shocks.

Market pricing, as indicated by ASX 30 Day Interbank Cash Rate Futures, aligns with these views, showing a 51% probability of a cut in August 2025 and implying further declines thereafter. However, forecasts vary: Reuters’ polls suggest only one more cut after August this year, while more optimistic views from ANZ and NAB predict a faster pace.

Key Influences

 Several factors will shape the RBA’s path: 

  • Inflation Trajectory: With inflation at 2.1% and expected to average 2.6% in 2025 and 2.7% in 2026, the RBA has leeway to cut without risking a rebound.

  • Economic Growth and Employment: Subdued GDP growth of around 2% in 2025 could prompt deeper cuts if unemployment rises sharply.  

  • Global Influences: Slower growth among major trading partners (forecasted to ease in 2025-2026) and international rate cycles will play a role. 

  • Housing and Financial Stability: Rate cuts are likely to boost property prices by 6% in 2025 and 4% in 2026, potentially straining affordability and requiring cautious easing.

  • Upside risks, such as renewed inflation from supply shocks or wage pressures, could delay cuts, while downside risks like a sharper economic downturn might accelerate them.

Implications and Conclusion

For homeowners and borrowers, these anticipated cuts promise relief, potentially reducing monthly mortgage repayments by hundreds of dollars over the next year. However, savers may face lower returns, and the property market could heat up, challenging first-time buyers. 

In summary, the next 12 months are likely to see the Australian cash rate decline from 3.85% to around 3.00%-3.10% by mid-2026, through a series of 25-basis point cuts in August and November 2025, followed by one or two more in early 2026. This trajectory reflects a consensus among economists for measured easing to support growth while guarding against inflation. As always, actual outcomes will depend on evolving data, with the RBA’s August 12 decision setting the tone for the period ahead. Investors and households should monitor RBA communications closely for any shifts in this outlook.

Kind Regards,

Shaun Smith
B.Com (Economics & Finance), Dip. Financial Services
Managing Director

Shaun Smith is one of Australia’s most experienced and successful brokers. Over the past 20 Years his companies have written in excess of $2Bn in loans.

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