Tomorrow, at 2 pm, all ASX eyes will be on the Reserve Bank of Australia (RBA). That's because, as it does most months, the RBA will meet tomorrow to determine whether interest rates will remain at 3.85%, or whether they will be changed.
Theoretically, the RBA could either raise, lower, or maintain the cash rate. But realistically, almost every commentator expects rates to be either kept on hold or cut by 25 or 50 basis points. An increase in rates is not realistically expected by any reputable commentator.
But of course, we've heard this argument before. Last month, economists were almost united in their view that the RBA would deliver its third interest rate cut of 2025. However, the RBA did not play ball, leaving rates on hold at 3.85%.
So what's different about this August meeting?
Well, what is different is that the RBA now has the latest inflation data from the quarter ending 30 June on its desk.
As we covered at the end of last month, Australia's consumer price index (CPI), which is a proxy for national inflation, rose by 0.7% in the June quarter to hit an annualised rate of 2.1%. That was down from 2.4% in the March quarter. Similarly, the trimmed mean (or core) inflation rate fell from 2.9% in the March quarter to 2.7% for the June quarter.
Both of these metrics are now comfortably within the RBA's inflation target band of between 2% and 3%.
Falling inflation, rising unemployment: Why the RBA might cut interest rates tomorrow
In addition to this falling inflation, there are also signs that Australia's economic growth is softening. In the middle of last month, we also covered the latest unemployment figures. These showed that the seasonally adjusted unemployment rate in Australia ticked up from 4.1% to 4.3% in June.
It is these two factors that are driving expectations of another rate cut tomorrow. Indeed, the ASX's RBA Rate Tracker is currently indicating that bond markets are pricing in a 51% chance of a 'double' 50-point rate cut from the RBA. That would take the cash rate down to 3.35%. If the RBA does cut tomorrow, it will be the third reduction in interest rates that we will have seen in 2025.
The RBA first moved rates in February, delivering a 25-basis-point reduction that saw the cash rate fall from 4.35% to 4.1%. Then, May saw the RBA cut again, once more dropping the cash rate by 25 points to 3.85%. That's where it remains today.
If the RBA surprises investors by maintaining rates at their current levels, expect some selling on the stock market. As we've discussed in recent weeks, the fresh record highs we've seen for the share market have largely been driven by expectations that interest rates have further to fall. So if this doesn't turn out to be the case tomorrow, investors may reverse some of the rises we've been seeing.
Let's see what the Bank comes out with tomorrow.
