TD Securities has updated its forecast for the Reserve Bank of Australia (RBA). They now expect two interest rate cuts of 25 basis points each in 2025, likely in August and November, lowering the cash rate to 3.35%. This change comes after signs of economic weakness in Australia. In the March 2025 quarter, GDP growth was just 0.2%, and per capita GDP has decreased in nine of the last eleven quarters. Contributing factors include weak consumer spending, bad weather, and uncertainties in the global economy.

Economic Challenges Despite Cautious Approach

Despite these issues, the RBA is cautious and does not expect to cut rates in July. However, they might consider a cut as a precaution against further economic decline. The RBA is ready to make quick cuts if global economic troubles, like US trade policies, threaten stability. Market trends align with TD Securities’ predictions, suggesting several rate reductions before early 2026 to boost growth. However, any changes will depend on new data, balancing the need to control inflation with efforts to maintain growth. The RBA already made a rate cut in May, with a meeting scheduled for July 7 and 8. TD Securities anticipates further adjustments from the RBA in August and November. Following the May decision, the cash rate is 3.85%. Two 25 basis point cuts would lower this to 3.35%. While this outcome is expected, the reasons deserve closer examination. Australian GDP growth has been slow, with a mere 0.2% growth in the March 2025 quarter. This is concerning, especially as per capita GDP has fallen in nine of the past eleven quarters, indicating deeper issues. This slowdown suggests households are struggling financially. Consumer demand is weak, affected by rising living costs and unpredictable weather, which dampens confidence in retail and housing. External risks, like trade tensions, only increase the pressure on the central bank to act. No rate cut is expected in July, showing that the RBA is willing to wait for clearer signals. However, there are subtle hints that policymakers are ready for quicker action. The two projected rate cuts in 2025 are not a certainty but a cautious response to worsening economic conditions, if they occur.

Outlook and Future Stimulus

Many economic analysts believe more stimulus will be needed as we head into 2026, and interest rate futures support this view. Market participants are now predicting several rate cuts before the end of the first quarter, highlighting the growing concern about the economy’s resilience. Price pressures will significantly influence the timing and scale of these adjustments. If inflation continues to fall while growth remains slow, the RBA might move one of the rate cuts forward to early 2025. However, with job numbers staying strong and migration supporting certain sectors, expectations will need to adjust based on new information. Looking ahead, risks may increase market volatility. The RBA’s flexible approach suggests that interest rate derivatives are already anticipating changes. Options pricing indicates rising volatility around November, hinting that some are preparing for unexpected shifts. In our strategy, being adaptable is crucial. We should focus more on data than stories—particularly core CPI, job vacancy rates, and consumer sentiment indices. Awareness of macroeconomic reports will be essential, especially in the weeks following the July meeting. It’s clear the central bank will act if they believe risks to growth are more urgent than cost-of-living concerns. While this is a careful balance, they have made similar decisions before. If policy changes happen sooner than expected, many may not be surprised. Create your live VT Markets account and start trading now.

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