RBA cuts cash rate in evolution, not revolution, of views
RBA cuts cash rate 0.25ppts to 3.6%, with more cuts assumed to be needed to keep inflation at target. Worst-case outcomes on global trade have been avoided, but RBA is now more pessimistic about near-term growth in output and productivity.
- The RBA Monetary Policy Board (MPB) cut the cash rate by 0.25ppts to 3.6% following its August meeting as widely expected. With underlying inflation clearly inside the 2–3% target range and heading towards its 2½% midpoint, the need for restrictive monetary policy is dissipating. The updated inflation forecasts are largely unchanged but show a 2.5% at the end of the (extended) forecast horizon to December 2027.
- The RBA’s forecasts are predicated on further cuts to the cash rate as expressed by market pricing last week. The trough rate implied by this assumption is now sub-3%, consistent with our own view. In the press conference, the Governor did not rule out back-to-back cuts and emphasised that the MPB would take things meeting by meeting. The every-other-meeting pace implied by our own recent forecasts still seems a reasonable base case, though.
- The RBA has downgraded its near-term view of trend productivity growth, and hence GDP growth. Importantly, this does not imply a downgrade to the long-run trend. In addition, the RBA has moved away from its view of a year ago that slow productivity growth presented an upside risk to inflation.
Today’s decision by the MPB to cut the cash rate was widely anticipated. Inflation is at target and likely to stay there. The labour market has eased further, though the statement still characterises it as ‘a little tight’. It was hard to construct a scenario where the information flow between the July and August meetings would have made the MPB want to keep rates on hold in August. Nonetheless, the benign print for Q2 underlying inflation and slight pick-up in unemployment were as expected. This helped ‘seal the deal’ and gave the six MPB members who had previously wanted to wait the evidence they needed to be comfortable cutting the cash rate in August. They joined the three who had voted for a cut in July for a unanimous vote this time, as we expected.
The evolution in the RBA’s views since May, as expressed in its forecasts, has been fairly minor. The unemployment forecast is unchanged, implying no further increases in the unemployment rate from here. At these levels, the RBA assesses that ‘some tightness remains’ in the labour market. This benign outcome is vulnerable to labour supply rising faster than working-age population growth, given the multi-decade trend increase in female participation.
The forecasts for trimmed mean inflation now show a 2.5% for end-2027, the additional period as the forecast horizon rolls forward with time. But the flat-as-a-pancake 2.6% rate remains the forecast for the whole period covered by the May forecasts. Within the total, housing-related inflation is expected to be a little higher than previously forecast, while traded goods inflation could be a little lower, given slower global growth amid trade disputation.
The SMP highlights that trade patterns have adapted to US tariffs relatively smoothly, even though tariff rates have landed somewhat higher than assumed a few months ago. In particular, the Chinese economy has remained resilient; a key judgement in the forecasts – which we share – is that the Chinese authorities will continue to use policy stimulus to ameliorate the impact from trade restrictions and ongoing US policy uncertainty.
The forecasts for public demand and consumption have been lowered relative to the May forecasts. However, both are still expected to pick up over the next couple of years. The SMP points to government budgets in support of a view that the weakness in public demand will be temporary. Lower interest rates and some positive real income growth will both support consumption growth, as also implied by our own forecasts.
The revised RBA forecasts are predicated on the cash rate declining further from here, with the implied trough at 2.9% in 2026, similar to our own expectations. In the media conference, the Governor highlighted that a couple more rate cuts were necessary to achieve the current forecasts and keep inflation at target. She also noted that holding rates constant from here would result in inflation falling below the target midpoint. The Governor did not rule out back-to-back cuts and emphasised that the MPB would take things meeting by meeting. The every-other-meeting pace implied by our own recent forecasts still seems a reasonable base case, though.
RBA productivity view finally catches up to Bank of Canada
The main change in the RBA’s views relates to GDP growth and productivity. Specifically, the RBA has revised down its assumption on trend productivity growth from around 1%yr to 0.7%yr, citing consistently lower outcomes than expected recently. The forecast for GDP has been revised down proportionally, though a pick-up in growth is still expected over the next couple of years.
The SMP devoted an entire chapter to explaining the change. Some of the recent weakness in productivity was acknowledged as being due to industry-specific factors that will unwind. These are the increased share of the non-market sector and the decline in mining productivity that Westpac Economics has been flagging for some time; the RBA’s quantitative estimates of the drag align with our own previously published estimates. However, the trend growth rate that the RBA expects productivity to converge to as these factors unwind is now this lower 0.7%yr rate. In the media conference, the Governor characterised the change as being a fix to a ‘puzzle’, whereby their inflation and unemployment forecasts turns out to be roughly correct, but GDP and wages growth both turned out to be weaker than forecast.
One consequence of the revised view of trend productivity growth is that the RBA’s view of potential or trend output growth over the next couple of years is also lower now. To put this in perspective, the downgrade to trend GDP is similar to the one implied by population growth being lower (1.2%–1.3%) in the forecast period than the 1.5%–1.6% range seen in the years leading up to the pandemic. The differences relate to the implications for (per person) living standards.
The recognition that productivity growth has been slower in recent decades than it was in the IT-boom of the late 1990s is not new (see this 2021 speech and this 2023 Bulletin article). It is also not Australia-specific but relates to a range of global factors, including the level of business dynamism, competition and adoption of technology. The downgraded RBA forecasts for business investment – and thus growth in the capital stock – have particular salience for this issue. These were reduced by more than GDP growth was, in recognition that slower demand growth lowers the return to future investment. This points to a disturbing path-dependence of lower growth begetting even less future supply capacity. If true, it would make a policy mistake of keeping policy too tight even more problematic.
Importantly, the RBA does not assume that the weaker trend for the next couple of years necessarily implies that the long-term trend growth in productivity (and hence potential output growth) will be low. This would have been a big call given the current optimism around AI and other technologies and their implications for productivity growth.
What is new is that the RBA explicitly states that this reassessment has no implications for inflation. All the hand-wringing a year ago about wages growth being too fast given trend productivity growth turned out to be misplaced. The explicit assumption now is that households and businesses have (likely subconsciously) adapted to slower productivity growth, which is why wages growth is slower. This is exactly how the Bank of Canada framed the issue more than a year ago. Accordingly, this change in view has not boosted the inflation forecasts, but if anything has reduced the RBA’s views of upside risks to inflation from this source and made it less nervous about further rate cuts.
Stay informed with Westpac IQ
Get the latest reports straight to your inbox.
Related articles
Browse topics
Disclaimer
©2025 Westpac Banking Corporation ABN 33 007 457 141 (including where acting under any of its Westpac, St George, Bank of Melbourne or BankSA brands, collectively, “Westpac”). References to the “Westpac Group” are to Westpac and its subsidiaries and includes the directors, employees and representatives of Westpac and its subsidiaries.
Things you should know
We respect your privacy: You can view our privacy statement at Westpac.com.au. Each time someone visits our site, data is captured so that we can accurately evaluate the quality of our content and make improvements for you. We may at times use technology to capture data about you to help us to better understand you and your needs, including potentially for the purposes of assessing your individual reading habits and interests to allow us to provide suggestions regarding other reading material which may be suitable for you.
This information, unless specifically indicated otherwise, is under copyright of the Westpac Group. None of the material, nor its contents, nor any copy of it, may be altered in any way, transmitted to, copied of distributed to any other party without the prior written permission of the Westpac Group.
Disclaimer
This information has been prepared by the Westpac and is intended for information purposes only. It is not intended to reflect any recommendation or financial advice and investment decisions should not be based on it. This information does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter into a legally binding contract. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This information may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure this information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of this information, or otherwise endorses it in any way. Except where contrary to law, Westpac Group intend by this notice to exclude liability for this information. This information is subject to change without notice and none of Westpac or its related entities is under any obligation to update this information or correct any inaccuracy which may become apparent at a later date. This information may contain or incorporate by reference forward-looking statements. The words “believe”, “anticipate”, “expect”, “intend”, “plan”, “predict”, “continue”, “assume”, “positioned”, “may”, “will”, “should”, “shall”, “risk” and other similar expressions that are predictions of or indicate future events and future trends identify forward-looking statements. These forward-looking statements include all matters that are not historical facts. Past performance is not a reliable indicator of future performance, nor are forecasts of future performance. Whilst every effort has been taken to ensure that the assumptions on which any forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from any forecasts.
Conflicts of Interest: In the normal course of offering banking products and services to its clients, the Westpac Group may act in several capacities (including issuer, market maker, underwriter, distributor, swap counterparty and calculation agent) simultaneously with respect to a financial instrument, giving rise to potential conflicts of interest which may impact the performance of a financial instrument. The Westpac Group may at any time transact or hold a position (including hedging and trading positions) for its own account or the account of a client in any financial instrument which may impact the performance of that financial instrument.
Author(s) disclaimer and declaration: The author(s) confirms that (a) no part of his/her compensation was, is, or will be, directly or indirectly, related to any views or (if applicable) recommendations expressed in this material; (b) this material accurately reflects his/her personal views about the financial products, companies or issuers (if applicable) and is based on sources reasonably believed to be reliable and accurate; (c) to the best of the author’s knowledge, they are not in receipt of inside information and this material does not contain inside information; and (d) no other part of the Westpac Group has made any attempt to influence this material.
Further important information regarding sustainability-related content: This material may contain statements relating to environmental, social and governance (ESG) topics. These are subject to known and unknown risks, and there are significant uncertainties, limitations, risks and assumptions in the metrics, modelling, data, scenarios, reporting and analysis on which the statements rely. In particular, these areas are rapidly evolving and maturing, and there are variations in approaches and common standards and practice, as well as uncertainty around future related policy and legislation. Some material may include information derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information. There is a risk that the analysis, estimates, judgements, assumptions, views, models, scenarios or projections used may turn out to be incorrect. These risks may cause actual outcomes to differ materially from those expressed or implied. The ESG-related statements in this material do not constitute advice, nor are they guarantees or predictions of future performance, and Westpac gives no representation, warranty or assurance (including as to the quality, accuracy or completeness of the statements). You should seek your own independent advice.
Additional country disclosures:
Australia: Westpac holds an Australian Financial Services Licence (No. 233714). You can access Westpac’s Financial Services Guide here or request a copy from your Westpac point of contact. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice.
New Zealand: In New Zealand, Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac (NZ division) or Westpac New Zealand Limited (company number 1763882), the New Zealand incorporated subsidiary of Westpac ("WNZL"). Any product or service made available by WNZL does not represent an offer from Westpac or any of its subsidiaries (other than WNZL). Neither Westpac nor its other subsidiaries guarantee or otherwise support the performance of WNZL in respect of any such product. WNZL is not an authorised deposit-taking institution for the purposes of Australian prudential standards. The current disclosure statements for the New Zealand branch of Westpac and WNZL can be obtained at the internet address www.westpac.co.nz .
Singapore: This material has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (as defined in the applicable Singapore laws and regulations) only. Recipients of this material in Singapore should contact Westpac Singapore Branch in respect of any matters arising from, or in connection with, this material. Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore.
U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. The services and products referenced above are not insured by the Federal Deposit Insurance Corporation (“FDIC”). Westpac Capital Markets, LLC (‘WCM’), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (‘the Exchange Act’) and member of the Financial Industry Regulatory Authority (‘FINRA’). In accordance with APRA's Prudential Standard 222 'Association with Related Entities', Westpac does not stand behind WCM other than as provided for in certain legal agreements between Westpac and WCM andobligations of WCM do not represent liabilities of Westpac. This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. Transactions by U.S. customers of any securities referenced herein should be effected through WCM. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments.
The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person of WCM or any other U.S. broker-dealer under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.
UK and EU: The London branch of Westpac is authorised in the United Kingdom by the Prudential Regulation Authority (PRA) and is subject to regulation by the Financial Conduct Authority (FCA) and limited regulation by the PRA (Financial Services Register number: 124586). The London branch of Westpac is registered at Companies House as a branch established in the United Kingdom (Branch No. BR000106). Details about the extent of the regulation of Westpac’s London branch by the PRA are available from us on request.
Westpac Europe GmbH (“WEG”) is authorised in Germany by the Federal Financial Supervision Authority (‘BaFin’) and subject to its regulation. WEG’s supervisory authorities are BaFin and the German Federal Bank (‘Deutsche Bundesbank’). WEG is registered with the commercial register (‘Handelsregister’) of the local court of Frankfurt am Main under registration number HRB 118483. In accordance with APRA’s Prudential Standard 222 ‘Association with Related Entities’, Westpac does not stand behind WEG other than as provided for in certain legal agreements (a risk transfer, sub-participation and collateral agreement) between Westpac and WEG and obligations of WEG do not represent liabilities of Westpac.
This communication is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. This communication is not being made to or distributed to, and must not be passed on to, the general public in the United Kingdom. Rather, this communication is being made only to and is directed at (a) those persons falling within the definition of Investment Professionals (set out in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”)); (b) those persons falling within the definition of high net worth companies, unincorporated associations etc. (set out in Article 49(2)of the Order; (c) other persons to whom it may lawfully be communicated in accordance with the Order or (d) any persons to whom it may otherwise lawfully be made (all such persons together being referred to as “relevant persons”). Any person who is not a relevant person should not act or rely on this communication or any of its contents. In the same way, the information contained in this communication is intended for “eligible counterparties” and “professional clients” as defined by the rules of the Financial Conduct Authority and is not intended for “retail clients”. Westpac expressly prohibits you from passing on the information in this communication to any third party.
This communication contains general commentary, research, and market colour. The communication does not constitute investment advice. The material may contain an ‘investment recommendation’ and/or ‘information recommending or suggesting an investment’, both as defined in Regulation (EU) No 596/2014 (including as applicable in the United Kingdom) (“MAR”). In accordance with the relevant provisions of MAR, reasonable care has been taken to ensure that the material has been objectively presented and that interests or conflicts of interest of the sender concerning the financial instruments to which that information relates have been disclosed.
Investment recommendations must be read alongside the specific disclosure which accompanies them and the general disclosure which can be found here. Such disclosure fulfils certain additional information requirements of MAR and associated delegated legislation and by accepting this communication you acknowledge that you are aware of the existence of such additional disclosure and its contents.
To the extent this communication comprises an investment recommendation it is classified as non-independent research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and therefore constitutes a marketing communication. Further, this communication is not subject to any prohibition on dealing ahead of the dissemination of investment research.