RBA expected to cut interest rate as inflation cools, unemployment rises
- The Reserve Bank of Australia is expected to lower the interest rate by 25 basis points to 3.60% in August.
- The focus will be on RBA Governor Michele Bullock’s press conference and updated economic forecasts.
- The Australian Dollar braces for a big reaction to the RBA policy announcements.
The Reserve Bank of Australia (RBA) is expected to announce a 25 basis points (bps) cut to the Official Cash Rate (OCR) to 3.6% from 3.85% following the conclusion of its August monetary policy meeting on Tuesday. The decision will be announced at 04:30 GMT.
The Monetary Policy Statement will be accompanied by the quarterly economic forecasts. RBA Governor Michele Bullock’s press conference will follow at 05:30 GMT.
As the rate cut is fully baked in, the Australian Dollar (AUD) braces for intense volatility on any surprises offered by the central bank’s updated projections or Governor Bullock’s comments during the press conference.
RBA set to lower interest rate, what’s next?
Following the surprise interest rate hold in July, in a rare split decision of six to three, the Reserve Bank of Australia now seems on a clear path to lower the OCR on Tuesday as inflation has recently slowed more-than-expected and the Unemployment Rate has hit a three-and-a-half-year high.
The Minutes of the RBA’s July meeting showed that the majority of the board wanted to wait for more information, including quarterly price data, to confirm inflation was slowing.
The headline Consumer Price Index rose 0.7% in the second quarter compared with the previous three-month period, nudging the annual pace down to 2.1% from 2.4%, registering the lowest reading in more than four years and approaching the lower bound of the central bank’s 2% to 3% inflation target.
Meanwhile, the Unemployment Rate rose to 4.3% in June, up from 4.1% in May, according to the Australian Bureau of Statistics (ABS) data. Other details of the jobs report showed that employment increased by 2,000 people in June, but the number of officially unemployed people jumped by 33,600.
Markets predict the RBA to continue cutting its benchmark rate to 3.10% or lower by early next year.
However, the updated economic projections and/or the vote split could offer fresh surprises on the central bank’s path forward on rates.
Uncertainty in the RBA’s communication remains high after the April shake-up that shifted rate-setting power entirely to a new nine-member Monetary Policy Board (MPB).
The changes to the MPB resulted in the July surprise outcome, shocking markets.
How will the Reserve Bank of Australia’s decision impact AUD/USD?
Speaking at the press conference after the July policy decision, RBA Governor Michele Bullock explained that the bank could no longer offer guidance because the rate decision was up to the board alone and it could not be pre-empted.
However, Bullock did note that markets “can expect rates to decline if inflation slows as expected” and that the policy decision “will be based on our forecasts of future inflation.”
Therefore, if the central bank lowers its inflation and growth forecasts, it could ramp up the odds of further rate cuts, fuelling a fresh downtrend in the AUD.
On the contrary, if Bullock downplays risks to the economy due to US tariffs and reiterates that “a measured, gradual approach to monetary policy easing is appropriate,” Aussie buyers could regain control.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical indicators for trading AUD/USD following the policy announcement.
“AUD/USD is seeing increased downside risks heading into the RBA showdown, having faced rejection near the 0.6550 level on several occasions. Adding credence to the bearish potential, the 21-day Simple Moving Average (SMA) has cut the 50-day SMA from above, confirming a Bear Cross on the daily chart. Still, the 14-day Relative Strength Index (RSI) remains above the midline.”
“A dovish cut by the RBA could reinforce the selling interest, sending AUD/USD to challenge the August 5 low of 0.6450, where the 100-day SMA closes in. Failure to resist above that level could threaten the August low of 0.6419, below which the 0.6350 psychological barrier will come into play. Conversely, buyers need a decisive break above the 0.6550 threshold to revive the recovery toward the 0.6600 mark. The next topside target is aligned at the July 24 high of 0.6625,” Dhwani adds.
Economic Indicator
RBA Interest Rate Decision
The Reserve Bank of Australia (RBA) announces its interest rate decision at the end of its eight scheduled meetings per year. If the RBA is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Australian Dollar (AUD). Likewise, if the RBA has a dovish view on the Australian economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for AUD.
Read more.Next release: Tue Aug 12, 2025 04:30
Frequency: Irregular
Consensus: 3.6%
Previous: 3.85%
Source: Reserve Bank of Australia
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.