After a shocking rate pause that blindsided the whole country last month, the Reserve Bank of Australia (RBA) is finally giving the people what they want. That’s right - the RBA has officially announced a cut of 0.25%, bringing the cash rate down to 3.60%. 

While many economists were humbled by their incorrect prediction last month, 98% of financial markets and all four major banks predicted a rate cut this month (and we can hear the collective sigh of relief now that it’s here).

In other news, the big four banks aren’t just predicting one cut. They are calling a cutting cycle that could potentially bring the cash rate down as low as 2.85%. But as we’ve seen last month, the RBA has lagged behind other central banks and played a cautious hand with cutting rates in Australia.

Why is the RBA cutting rates again?

The short answer is - falling inflation. In the June quarter, the RBA’s favourite measure of inflation called the “trimmed mean inflation” dropped to 2.7% (down from 2.9% in March quarter), and the Consumer Price Index dropped to 2.1% (the lowest it's been in 4 years). This is great news because it’s on the lower end of the RBA’s target range of 2-3%. 

In more relatable terms, lower inflation means most goods and services in Australia (from a bag of mandarins to the cost of building a home) are becoming more affordable…even if it might not feel like it yet.

And while economists thought a cut was all but guaranteed in July, the RBA was still waiting for the last puzzle piece to fall in place - a cooling job market. With the latest unemployment rate rising to 4.3%, it is now in line with the RBA’s expectations, which has paved the way for a rate cut this month. 

What happens when the cash rate is cut?

If you’ve got a variable-rate home loan, this could knock a few hundred bucks a month off your repayments… eventually.

Banks tend to pass rate cuts on (slowly), and it usually takes a couple of months to feel the full effect.

Savers, sorry, you might see interest on your accounts slide again. It’s worth shopping around or parking cash in high interest saver accounts instead.

Where to from here?

If inflation keeps heading south and the labour market holds up, we could see another cut in November. But don’t bank on a full-on rate-slashing spree – the RBA’s still moving cautiously.

For now, we’re back in cut territory…and we’re not taking it for granted!

Remind me, why are the rates so high?

As recently as May 2022, interest rates were at a historic low of 0.1% and economic conditions in Australia were pretty stable.

But with economic slowdown coming out of the pandemic, and geo-political tensions globally, inflation skyrocketed. The RBA went hardcore with thirteen cash rate increases in twenty two months. And now, the RBA is slowly but surely unwinding these rate hikes. 

While it might feel like the cash rate is currently quite high, you might have just gotten used to the rock-bottom cash rate during the pandemic. 

In the bigger picture, it’s not all that extreme. Back in the mid-2000s, rates were hanging around 6 to 7%, so today’s level is more middle-of-the-road. 

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