Australia Slashes Interest Rates, Lowers Economic Growth Outlook
- Important Points
The RBA had lowered its full-year GDP predictions for 2025 to 1.7% from 2.1%.
The rate drop was prompted by falling inflation, which stood at 2.1% in the June quarter.
Australia's central bank dropped benchmark lending rates by 25 basis points on Tuesday, while reducing the country's yearly economic outlook.
The Reserve Bank of Australia cut its annual economic growth prediction to 1.7% from 2.1%, citing a weaker-than-expected rise in public demand in early 2025 as unlikely to be compensated by the remainder of the year.
The country's benchmark interest rates are now at 3.6%, the lowest since April 2023 and in line with economists polled by Reuters.
The RBA stated that price increases have declined "significantly" since its peak in 2022, with higher interest rates putting aggregate demand and expected supply "closer to balance."
The S&P/ASX 200 stock index in Australia increased by 0.3% following the conclusion, while the Australian currency fell by 0.15% percent to 0.6501 against the US dollar.
Australia's second-quarter price increase rate was 2.1%, the lowest since March 2021 and around the lower half of the RBA's 2%-3% target range.
Tuesday's rate decrease comes amid a dramatically altered trade environment as U.S. tariffs go into force, as well as slower-than-expected economic growth in the first quarter.
President Donald Trump imposed a baseline 10% tariff on Australia, which the country's trade minister allegedly praised as "vindication" of the government's discussions.
The RBA stated that the likelihood of a "very damaging" trade war has lessened, and "recent international trade policy developments have had little discernible impact on the Australian economy to date." It did, however, caution that a more serious interruption to global trade may occur.
The central bank stated that the lower GDP growth prediction is due more to a lower outlook for productivity growth than to trade interruptions.
In the first quarter, the country's GDP increased 1.3% year on year, falling short of a Reuters poll projection of 1.5% growth. Every quarter, the economy grew by 0.2%, falling short of projections of 0.4%.
Katherine Keenan, ABS head of national accounts, blamed the slow growth on reduced public spending, as well as weaker consumer demand and exports.
Analysts at Commonwealth Bank of Australia predict another rate drop in November, with another possible in "early 2026."
Based on the RBA's lower inflation projection, Capital Economics' Asia-Pacific head, Marcel Thieliant, expects rates to fall to 2.85% by the middle of 2026.