The Reserve Bank of Australia (RBA) has cut the cash rate by 25 basis points to 3.60%, as expected. This change shows that the economy is stabilizing, and the central bank is focusing more on overall trends rather than single data points. There might be another rate cut in the fourth quarter, which could bring the cash rate down to 3.35%. However, if the economy takes a sudden downturn, it could lead to a series of larger rate cuts.

RBA’s Updated Forecasts

The RBA now aims for a cash rate of 2.9% by the end of 2026, a change from its earlier prediction of 3.2%. It expects the unemployment rate and trimmed mean CPI to stay at 4.3% and 2.6%, respectively, by late 2025. The GDP growth forecast for 2025 has also been lowered from 2.1% to 1.7%. In a recent press conference, the RBA discussed lowering the trend productivity growth estimate to 0.7% per year. The bank plans to manage these forecasts without specific productivity targets, focusing instead on overall data trends for policy decisions. The Reserve Bank of Australia has lowered the cash rate to 3.60%, a move we anticipated. This shows that the bank is reacting to a slowing economy rather than persistent inflation. We interpret this as a clear signal that the peak of the tightening cycle from 2023 is now behind us. With another rate cut to 3.35% likely in the fourth quarter, it’s wise to prepare for lower yields. Australian 3-year government bond futures are looking attractive, as they respond most effectively to these near-term policy changes. Data from the Australian Bureau of Statistics showing a rise in July unemployment to 4.2% supports the RBA’s urgency to act soon.

Effects on Currency and Markets

This cautious policy direction is expected to weaken the Australian dollar against the US dollar. With the GDP growth forecast downgraded to 1.7% for this year, we should see any increases in the AUD as a chance to sell. Weak consumer sentiment data from August highlights a lack of momentum in the domestic economy, making the currency less appealing to foreign investors. In the stock market, the situation is more balanced, presenting opportunities for volatility trades using options on the ASX 200. While lower rates generally benefit equities, the reasoning behind these cuts is due to lower productivity and growth expectations. We believe that sectors sensitive to rates, like real estate and utilities, may do well, but the broader index could lack clear direction. Looking ahead, the RBA’s projection of a 2.9% cash rate by the end of 2026 indicates that the easing cycle has further to go. This supports a long-term strategy of locking in fixed rates on interest rate swaps. This sustained dovish outlook marks a significant shift from the aggressive rate hikes seen just two years ago. Create your live VT Markets account and start trading now.

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