The Reserve Bank of Australia (RBA) is likely to lower the cash rate from 3.85% to 3.60%. This decision comes after a report showed trimmed mean inflation fell to 2.7% year-on-year, down from 2.9% in the first quarter. Markets expect rate cuts of up to 63 basis points by year-end. However, the RBA is cautious and will likely stick to its current guidance unless inflation and job market conditions change.

Future Rate Cuts and Economic Conditions

The RBA’s future rate cuts depend on inflation and job market trends. If both meet expectations, more cuts could happen; if not, the RBA will remain careful. The neutral rate is thought to be around 3%, though this has not been officially confirmed by the RBA. Key labour market data is due on August 14 and September 18 and will influence future rate decisions. The Australian dollar has limited downside but could strengthen based on new data and the RBA’s actions. The RBA may only implement one more cut after August, highlighting the importance of upcoming economic reports. Last week, the RBA made the expected 25 basis point cut, lowering the cash rate to 3.60%. This was anticipated by the markets after a weak Q2 inflation report. The focus now is on what comes next, as the RBA’s statement was cautious. Market expectations include around 38 basis points of further cuts by the end of 2025, indicating at least one more cut is likely. Still, the RBA is hesitant to indicate its next steps, preferring to gather more data, which differs from market expectations.

Inflation Trends and Market Expectations

Inflation trends are unclear, as July’s monthly CPI rose slightly to 3.8% from June. This slow increase in prices supports the RBA’s caution. It complicates the likelihood of consecutive rate cuts at the September 30 meeting. We’re closely monitoring the job market for signs of weakness. The unemployment rate in July rose slightly to 4.2%, but this gradual increase is not severe enough to push the RBA to act. The upcoming labour market report this Thursday, August 14, will be pivotal in forming expectations. With the recent rate cut already factored into the currency’s value, the Australian dollar has limited downside risk. The chances now lean toward appreciation, especially if the upcoming data exceeds expectations. For instance, a strong jobs report would challenge the need for further urgent cuts. From a trading standpoint, this creates interest in long volatility strategies for the Australian dollar. Given the uncertainty, traders could explore options to prepare for significant price shifts around important data releases. A surprising labour report this week might quickly lead the market to reevaluate the chances of a cut in the fourth quarter. The RBA’s cautious, data-focused strategy is not new, as seen during the easing cycle in 2019. Then, the bank often paused for several meetings to analyze the impact of its cuts before proceeding. This history suggests we shouldn’t expect the RBA to rush into its next move. Create your live VT Markets account and start trading now.

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