Will the RBA cut interest rates in July?

Hi everyone, it is Monday, the 7th of July 2025 for this SBS on the Money podcast. We are giving you consumer finance and market news you can use without all of the fluff. The Australian share market is relatively quiet today, although it was down 0.16% on the S&P ASX 200 today, 8,589. Luke McMillan from Air Capital Management has the details in a few moments. But first, on interest rates, markets are pricing in a 75% chance of a rate cut tomorrow. For more, I spoke with senior strategist at Rabobank, Benjamin Pickton.

BENJAMIN PICKTON

The inflation mandate has effectively been achieved, so we're seeing headline inflation well within the target band — at the low end of the target band, actually, if we're looking at the monthly indicator.

BENJAMIN PICKTON

And even trimmed mean, the measurement of core inflation that the RBA prefers, is now within the target band and on the monthly indicator below the midpoint of the target band. So if inflation is no longer a problem, the attention turns to growth and what's happening with unemployment. And on those scores, the RBA has a little bit of work to do that suggests that they can lower the cash rate.

RICARDO GONÇALVES

On inflation, what are businesses saying about their ability to pass on inflationary pressures to consumers, and what's that a sign of?

BENJAMIN PICKTON

Yes, so inflation, when it first cropped up, effectively it was a problem of excess demand. So there was too much demand to soak up the available supply, and because of that we had a scarcity problem, and you need to ration scarce goods and services through the price mechanism. That's how you get rising prices.

BENJAMIN PICKTON

What we're seeing now is that businesses are telling us that there's not enough demand out there to soak up higher prices. They no longer have pricing power, they no longer have the ability to pass on cost increases. And as a result, we're starting to see some discounting popping up in certain sectors of the economy — most notably new home construction costs. We're starting to see discounting there, whereas previously, that was a bit of a problem child for inflation.

RICARDO GONÇALVES

OK, so if that's in the domestic environment, to what extent do you think the international environment is concerning the RBA, and how does that factor into their decision-making process when it comes to further rate cuts on the horizon? Because didn't the RBA say last time that tariffs, for example, will have a deflationary effect on Australia?

BENJAMIN PICKTON

Yeah, so there's a huge amount of uncertainty in the international environment at the moment. This week, as we record this, we've got tariff announcements coming up later this week. Nobody quite knows what the numbers are going to be. We don't know if they're going to be the figures that were announced on April 2nd. We don't know if there's going to be some sweetheart deals for certain countries. So there's still a lot of uncertainty. Throw into that some uncertainty around energy issues emanating from the conflict in the Middle East.

BENJAMIN PICKTON

All of that add into this theme of uncertainty in the market. And when there's uncertainty, businesses don't like to invest. It's difficult to unwind these large costly investment decisions. There is some value associated with having time to wait, to delay those decisions. So this is a real consideration for the RBA.

BENJAMIN PICKTON

Because one of the big problems that we've had is lack of productivity growth. That's inhibiting the economy's ability to grow. And if businesses aren't investing because they're not confident about the outlook, it's really difficult to grow productivity.

RICARDO GONÇALVES

So how many more rate cuts have you got pencilled in?

BENJAMIN PICKTON

Yeah, we think there's quite a few more to come. We've got July pencilled in — so this week — and we've also got August, November, and February of next year. So we think that the cash rate is going to get all the way down to 2.85%.

RICARDO GONÇALVES

And finally, that's Australia. What about internationally — the US in particular? Do you think the US Federal Reserve is on a slower path to cutting interest rates?

BENJAMIN PICKTON

Yeah, they certainly seem to be. Jerome Powell, the chairman of the US Federal Reserve, has effectively said that they would have cut interest rates already, except they're worried about the impact of tariffs on inflation, and they're uncertain about what tariffs mean for medium- to longer-term price growth. We think that tariffs are going to be inflationary in the United States, especially when you put that together with the tax cuts from the one big beautiful bill.

BENJAMIN PICKTON

And also lower energy prices, which should give a bit of a boost to the American economy. So overall, we think that the mix of all of those policies is going to be inflationary in the United States, and that's going to limit the ability of the US Federal Reserve to deliver interest rate cuts.

RICARDO GONÇALVES

That is Benjamin Pickton there from Rabobank. So he is forecasting four interest rate cuts in this cycle — another one tomorrow. Not everyone is, and that includes ANZ. ANZ's Indeed Job Ads Index rose to its highest in 12 months, and it could have some medium-term implications for the Reserve Bank. For that and more, I spoke with Adelaide Timbrel, senior economist at ANZ.

ADELAIDE TIMBREL

We think at ANZ Research that the Reserve Bank will cut interest rates by 25 basis points in tomorrow's meeting. We do think it will be a relatively close call — certainly closer than what market pricing suggests. What we have at the moment is inflation looking really good. The battle against inflation seems to be broadly over. We have a tight labour market, which we think will reduce the extent to which the Reserve Bank is not just tomorrow, but in general through the cycle.

ADELAIDE TIMBREL

But then we also have a pretty soft consumer sector. It's not that the average household is constrained — the household savings ratio is up, incomes are up — it's that spending growth isn't happening. And so this may be the case of just cutting rates a little bit to get that spending up.

RICARDO GONÇALVES

So I've got two follow-up questions based on that, right?

RICARDO GONÇALVES

I think the message will be that the Reserve Bank will try to give if they do cut rates by 25 basis points tomorrow, especially when we see more and more borrowers deciding to hold on to the higher level of mortgage repayments. We heard from the Commonwealth Bank today, for example, saying that only 10% of its eligible home loan customers chose to reduce their minimum repayment following the makeup.

ADELAIDE TIMBREL

What we'll see in the messaging if the Reserve Bank does cut rates is around encouraging a little bit of growth in the consumer sector and bringing the Reserve Bank cash rate closer to neutral. So if they are seeing that slow consumer spending or that lack of, as you say, people taking advantage of rate cuts by reducing their mortgage payments, they may see that as evidence that the current cash rate is restrictive.

ADELAIDE TIMBREL

It is still encouraging people to pay ahead on debt and not spend money, because whether you can change your interest rate or not, when interest rates are higher, you're saving a lot more interest every time you do pay ahead on your mortgage or keep money in an offset or savings account. So this would be just an encouragement to speed up the economy a little by doing that. I think they're still going to be quite cautious about the labour market, and I think they're gonna be talking a little less about the global risks compared to the last cut where global was very much the focus.

RICARDO GONÇALVES

And finally, can we talk about where ANZ sees interest rates going? I just spoke to an economist from Rabobank. He expects four rate cuts, including tomorrow. What does ANZ think, and how does the labour market factor into that decision — referencing the ANZ Indeed Job Ads Index that was out today too?

ADELAIDE TIMBREL

ANZ Research is a lot more cautious on the RBA easing cycle. We think that there will only be two rate cuts — one in July and one in August — and as you say, the tight labour market is a really key component of that call. What we have at the moment is over the last 14 months, the unemployment rate has been between 3.9% and 4.2%. Since August last year, ANZ Indeed Job Ads have been fluctuating within a very, very tight range — between 114 and 117.

ADELAIDE TIMBREL

Which is an index number. It just means we're seeing very little movement there. We saw very little movement over the past few months, including actually a rise in the latest data to the top of that range. So what that's telling us is that there's not a meaningful loosening in the labour market, which tends to be disinflationary — you know, pushes inflation down, it allows for wages to grow more slowly. And we love that. We love to see the unemployment rate low and inflation in the band at the same time.

ADELAIDE TIMBREL

That tells us the current conditions in the market are good for a healthy economy, and it means that the Reserve Bank has to be really careful about overstimulating. Because if you're already at a point where things are pretty good in the labour market and you actually cut rates too much, that can get people overexcited, it can push the labour market too tight, and it can also cause cost pressures elsewhere. Because if everyone's spending up, businesses do not have to be careful about their prices. And when businesses don't have to be careful about their prices, prices go up.

RICARDO GONÇALVES

It's Adelaide Timbrel there from ANZ.

RICARDO GONÇALVES

Now, market day on the SBS on the Money podcast. A relatively quiet day on the market, the S&P ASX 200 down 0.2% to 8,589, but it follows a few sessions of pretty minimal moves. Today though, utilities — they're doing best, that sector up 3.5%.

RICARDO GONÇALVES

But six of the 11 sectors on the ASX 200 finished lower, driven by the materials sector, consumer discretionary, and property. For that and more, I spoke with Luke McMillan, Head of Research at Ophir Capital Management.

LUKE MCMILLAN

It's a little bit boring, right? Obviously the market's a little bit rudderless at the moment in terms of the 4th of July holiday in the US and no trading, no great direction there for the Aussie market. We're flattish to slightly down through most of the session today.

LUKE MCMILLAN

Big news, I guess, in terms of tariffs and that 9th of July deadline, and it looks like there's some news on the wires about that getting pushed out for some countries to the 1st of August. And then also what's going to happen with interest rates — everyone's watching, with the big news being in Australia, at least, the RBA tomorrow.

RICARDO GONÇALVES

Those July 9 tariff announcements — how much of a big deal is it for investors, or has it already been priced into the market?

LUKE MCMILLAN

Yeah, well, as many market watchers will know, the falls post Liberation Day have been recovered — and then some — since.

LUKE MCMILLAN

And it still is something to watch, clearly, because we still don't know where those rates are going to land. We know that Trump’s been saying we're going to get deals or letters to be sent out by the 9th of July this week, and we still don't know exactly where they land. We know they're going to be stagflationary, but just how stagflationary we still don't know yet. Not a lot of risk is priced in, with an S&P 500 trading on a 22.5 times PE.

RICARDO GONÇALVES

OK, RBA decision out tomorrow. What chance is the market giving of a rate cut, why, and what about future cuts?

LUKE MCMILLAN

Yeah, the market's giving you about a 75% chance of a rate cut tomorrow — 25 basis points by the RBA — so certainly more likely than not.

LUKE MCMILLAN

Big survey out there of economists at the moment — I think one of them is showing 32 or 36% think that there's going to be a cut, so almost everyone is convinced. Those that are in the no-cut camp are generally the ones that are just saying, hey, let's be a little bit more patient. We don't need to cut again immediately. If the RBA does cut tomorrow, it'll be the first back-to-back cut since COVID, and maybe they should just take a little bit more time and get a little bit more inflation data.

LUKE MCMILLAN

But with the most recent trimmed mean inflation data — the monthly data — showing it's back in the middle of the RBA's target band, most are saying we're going to see a cut tomorrow, and then probably somewhere between three and four cuts — so 75 to 100 basis points of cuts over the next year.

RICARDO GONÇALVES

You guys had a few focus on small and mid-caps, right? Lower interest rates — what does it mean for the sector?

LUKE MCMILLAN

Well, I think — at least in our mind — it's certainly a positive. If you look at the run that we've had of underperformance from small caps over the last three or four years, it's coincided pretty nicely with the hike in rates.

LUKE MCMILLAN

That occurred through 2022. We know small-cap companies have more floating rate debt in general, and they are more sensitive to interest rates. So I think that a rate cut is likely to be one of the main catalysts for small caps to start outperforming. The question will be:

LUKE MCMILLAN

Is one cut going to be enough, or do we need to see a few more in the bank before we have full road and risk-taking back in the markets?

RICARDO GONÇALVES

Listeners will have another question. It's like, which small caps, right? What are you telling your clients at the moment, and where do you see the opportunities in general for investors?

LUKE MCMILLAN

Yeah, I do think we need more rate cuts than probably one rate cut tomorrow to see that kind of risk-taking coming along. We are still in restrictive territory for rates in Australia — and certainly in the US as well. So for now, if you are in the small-cap part of the market, I think it's still keeping liquidity relatively high, looking for companies that are high quality and profitable at this point of the cycle.

LUKE MCMILLAN

There will come a point where it's worthwhile getting into the more cyclically oriented growth companies, but I think we need to look probably two or three or four more rate cuts down the track from the RBA before we start getting into that mode.

RICARDO GONÇALVES

That is Luke McMillan from Air Capital Management. Don't forget — if you enjoy the podcast, give it a rating or a review on Apple Podcasts and Spotify and click subscribe.

RICARDO GONÇALVES

This SBS on the Money podcast is provided for informational purposes only. The content on this podcast should not be understood as constituting advice or a recommendation. It is not personal advice and does not consider your personal circumstances or objectives. You should contact a licensed professional before making any financial decision.

END OF TRANSCRIPT