The Reserve Bank of Australia (RBA) is likely to lower its cash rate by 25 basis points to 3.60% at its meeting on August 12. This expected change follows weaker inflation and labor market data, according to all 40 economists surveyed in a Reuters poll.

Inflation and Unemployment Indicators

Recent data shows that headline inflation dropped to 2.1% last quarter, close to the RBA’s target range of 2–3%. The unemployment rate rose to 4.3% in June, reaching its highest level in three and a half years. Weak domestic demand and lower household spending, which accounts for over half of the GDP, back the case for easing monetary policy. Among economists, 35 out of 38 predict another 25 basis point cut in the fourth quarter, which would lower the cash rate to 3.35% by the end of the year. All major banks support this view. The median forecasts suggest one more reduction by March 2026 down to 3.10%, with rates expected to remain steady for the rest of that year. With a rate cut almost certain for August 12, we should prepare for lower yields. This means buying interest rate futures, as their prices will rise when the RBA cuts the cash rate to 3.60%. The strong expectation of another cut to 3.35% by year-end indicates that holding these long positions could be profitable through the fourth quarter. This policy change follows an aggressive tightening cycle that raised rates to a peak of 4.35% in late 2023. Now, we see the impact: headline inflation has plummeted to 2.1%, and the unemployment rate has hit a three-and-a-half-year high of 4.3%. These figures confirm that the economy has cooled enough for the RBA to ease monetary policy.

Exchange and Equity Market Implications

The widening interest rate gap with other central banks should keep pressure on the Australian dollar. We may consider shorting the AUD, either through futures or by buying put options, as it currently hovers around 0.6650 against the US dollar. A drop below recent support could lead to a test of the 0.6400 level seen during times of global economic uncertainty in 2023. For equity derivatives, lower borrowing costs signal a positive outlook for the Australian market. We might look at long positions in ASX 200 futures, expecting that cheaper credit will enhance corporate earnings and boost investor sentiment. A continued easing cycle could give the momentum needed to push the index past recent resistance levels. Create your live VT Markets account and start trading now.

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