The Reserve Bank of Australia delivered a much-anticipated rate cut at its meeting on Tuesday and flagged the potential for two or three more, while warning of slow economic growth for the foreseeable future.
The RBA’s monetary policy board voted unanimously to drop the official cash rate target to 3.6%, from 3.85%.
All four major banks announced they would pass the cut on to customers by the end of August. Once lenders pass on the relief to their borrowers, the third rate cut of the year will deliver somebody with a $500,000 mortgage a further $74 off their monthly interest payments, according to Canstar, bringing the total drop to $272.
Michele Bullock, the RBA governor, said the bank was increasingly confident in its predictions that unemployment would not rise and inflation would stay near the target low level.
“That’s our best guess, and we’re looking to see that we continue on that path and, as we do, we can continue to lower interest rates,” she said.
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“It’s a nice set of forecasts … conditioned on a continual lowering in interest rates: a couple more, two-slash-three.”
But tempering the welcome development for more than 3m mortgaged households was a downbeat new economic outlook that predicted “persistently” lower productivity growth than previously expected.
In a statement that will further raise the stakes for the Albanese government ahead of Labor’s three-day economic reform roundtable from next Tuesday, the RBA also slashed its forecasts for longer-term productivity growth from 1% to 0.7%.
Weaker-than expected national productivity flowed through to an about $30bn downgrade to economic growth over the coming two years, with the country’s trend economic growth rate lowered from 2.2-2.3% to just 2.0%.
The new forecasts show lower productivity growth also flowing through to lower wages growth, with the RBA predicting average earnings per hour, after inflation, would grow by 0.7% in the year to June 2027, versus a previous estimate of 1%.
Jim Chalmers has made finding ways to boost productivity a key commitment for the government’s second term, and the RBA estimates show Australians’ real incomes will grow more slowly than previously thought over coming years.
Speaking at Parliament House, the treasurer said it was “a good day” for millions of Australians, even as he conceded there were longer-term challenges.
“Our economy is not productive enough,” Chalmers said.
“It’s not resilient enough in the face of all this international uncertainty. And we’ve made good progress on the budget as well. But we need to try to make it even more sustainable. And so these are the challenges before us.”
In its Statement on Monetary Policy, the RBA said “for some time, our forecasts have implicitly assumed that productivity growth was temporarily weak and would gradually return to, and be sustained at, higher historical growth rates”.
The central bank’s economists conceded they have been too optimistic about the prospect for a productivity reversal, and that the problems were “persistent”.
“There is a risk that our new trend productivity assumption remains too optimistic,” the RBA said.
Tuesday’s cut was widely expected after the bank’s surprise decision to leave interest rates on hold in July, with the economist Dr Brendan Rynne describing the decision as “better late than never”.
“Another couple of cuts is required to energise our economy again and turn things around,” said Rynne, the chief economist at KPMG.
Analysts at each of the major banks expect at least one more interest rate cut by the end of 2025, taking the cash rate to 3.35%.
The RBA forecasts referenced by the governor indicate inflation and employment could be held stable with a cash rate as low as 2.9% by the end of 2026, or almost three further cuts.
