RBA Delivers Dovish 25bp Cut as Markets Brace for Further Easing in 2025

While we await Gov Bullock’s presser, the RBA’s statement offered limited push back on market expectations for further RBA easing, and swaps traders saw the statement and the new set of economic projections as possibly even opening the door to a third 25bp this year…the Q2 CPI print on 30 July, as well as developments in the labour market and global trade are set to guide market expectations for future RBA easing.

While market positioning is always a factor that impacts the extent of movement in a market when we marry the facts (from a major market event) to prior pricing/expectations, the initial reaction in Aussie markets is clear cut - and while not overly prolific, we can certainly say the response has been taken as a ‘dovish cut’.

We’ve seen solid buyers of shorter-dated Aussie govt bonds, with Aus 3yr govt bond yields trading lower by punchy -17bp (3.62% to 3.45%), in turn, this has resulted in a solid bull steepening of the 3s v 10s yield curve. AU Interest rate swaps now price 67bp of cuts by December (from 55bp) – this essentially implies two 25bp cuts by year-end and a 68% chance of a third.

AUDUSD trades 0.6445 to 0.6408, before finding better buyers, while the more interest rate sensitive AUDNZD has been sold from 1.0887 to 1.0834. The ASX200 has gained 0.3% since the statement dropped.

The moves in AUD FX are not prolific moves by any means, and I would have possibly expected a bigger selloff in the AUD given the strong move lower front-end yields – but I guess the statement has not thrown up any significant surprises.

There is a hint of insurance easing in this statement, and it is suggestive that this action is the path of least regret, knowing that the 25bp cut will take time to truly filter through to the real economy and trade deals could feasibly fail. With tariff uncertainty – among other factors – shaving 30bp off the RBA’s GDP forecast for the December quarter (now seen at 2.1% vs 2.4% in the Feb SoMP), an implied slower pace of growth justifies the rally in rates. We also consider that China will be pushing for new markets to redistribute its goods away from the US, and Australia will be asked to absorb their share, and this could prove to add to the disinflation effect.

The RBA’s forecasts for trimmed mean (TM) inflation have certainly been a factor that has impacted local rates pricing, with the RBA's forecasts taken down 10bp to 2.6% in all quarters ahead. Certainly the TM CPI forecasts for both the December 2025 and June 2026 quarters have come in lower than expected and justifies the notion that the RBA should cut the cash rate by a further 25bp in August and again in December, although, as I say, there is some conjecture if the RBA squeeze in one more in along the way.

The 50bp of additional implied cuts by December feels a fair call, judging by the tone of the statement and the economic projections. We can see that the market pricing has the RBA taking the cash rate to a trough rate of 3.10% by March 2026, which falls in line with the RBA’s own forecasts for a low/trough cash rate of 3.2%

Naturally, if the labour market was to deteriorate at a faster clip and the unemployment rate was on a trajectory to push towards 4.5% by December, then market pricing would likely imply a ‘terminal’ RBA cash rate below 3%, and a greater discount to the RBA’s own terminal forecast - the greater the discount to 3.2%, the higher the perceived recession odds. With the government not holding back on its fiscal plans, and with household real income also rising and consumption holding in, it seems unlikely that we will see a material deterioration in the labour market, but it's not out of the question.

Let’s see if we learn anything new from Gov Bullock’s speech and how Europe and the US trade this move.

Good luck to all.