The Australian Financial Review reported on July 7 that, due to slowing inflation and weak economic growth, it is widely expected that the Reserve Bank of Australia (RBA) will conduct its first consecutive rate cuts since the pandemic, with some forecasters even predicting up to six more rate cuts by the end of next year.

The latest quarterly survey by The Australian Financial Review found that out of 36 economists surveyed, 32 predicted that the RBA would cut the official cash rate by 0.25 percentage points to 3.6% at the end of its two-day board meeting starting on Monday.

(Photo credit: The Australian Financial Review)

Benjamin Picton, a senior macro strategist at Rabobank, said in the survey that capacity pressures in the economy are fading, and the fight against inflation has basically been won.

He expects a total of four rate cuts by the end of 2026.

Picton added that companies are finding it harder to pass on higher costs, and changes in labor participation rates indicate that job seekers' enthusiasm has weakened.

The focus now is on restoring economic growth to trend levels and setting a floor for employment.

For many economists, the latest inflation data has laid the foundation for a rate cut in July.

Data showed that inflation pressure continued to ease in May, reaching a four-year low of 2.4%.

This prompted UBS, Barrenjoey, and ANZ to bring forward their prediction of the next rate cut to this week.

They joined the ranks of Commonwealth Bank, Deutsche Bank, and RBC Capital Markets, which also expect a rate cut on Tuesday. The bond market almost completely anticipates a 25-basis-point rate cut. If that happens, it will be the third rate cut by the RBA this year and the first consecutive rate cuts since March 2020, when the RBA took rate cuts to protect the economy from a prolonged recession.

RBA Governor Michele Bullock had shocked the bond market in May by revealing that she was more concerned about the sharp downward impact of the Trump administration's comprehensive tariff policies on the economy, which will take effect this week, compared to inflation concerns.

The RBA even considered a 50-basis-point rate cut at its May board meeting but ultimately decided on a standard 25-basis-point cut, lowering the rate to 3.85%.

(Photo credit: The Australian Financial Review)

Although there is a broad consensus that lending costs in Australia may further decline this year and next year, there is significant variation in predictions regarding how low the RBA will lower the cash rate, ranging from 3.6% to 2.25%.

The bond market currently expects three rate cuts this year, while The Australian Financial Review's survey of economists predicts a median of 2.5 cuts.

Tim Toohey of Yarra Capital Management is one of the more dovish forecasters, expecting five more 0.25-percentage-point rate cuts by December 2026, bringing the cash rate down to 2.6%.

Craig Emerson of Emerson Economics is even more dovish, forecasting the cash rate to fall to 2.35%.

Toohey said the RBA is disappointed with the pace of economic growth in recent months and noted that inflation is now close to the midpoint of the central bank's target range.

The macro strategist said the RBA has "set the path to return interest rates to a 'neutral' level"—that is, an interest rate that neither stimulates nor suppresses growth—and the RBA's estimate of the neutral rate is likely to have been lowered in recent months.

"Combined with our more cautious view on China's growth prospects than the RBA and a more optimistic outlook on the Australian dollar, we believe the RBA will eventually cut rates more than most people expect."

Deutsche Bank and Morgan Stanley's forecasts are closer to the market, predicting three rate cuts in 2025—July, August, and November—which would bring the cash rate to around 3.1% by the end of this year.

Barrenjoey predicts three rate cuts by February next year, bringing the rate to that level. Barrenjoey's chief economist, Jo Masters, added a clarification to her bank's forecast, stating that if the Australian economy continues to be weak, more rate cuts may be needed.

She said, "The economy is struggling to escape slow growth, and we are beginning to see the risk that inflation may fall into the lower half of the policy target range. We believe the risk that the RBA may need to cut rates further in 2026 to reach a slightly accommodative level is increasing."

Masters added that global growth prospects are "highly uncertain," and weak domestic growth may face further challenges, "if consumers do not show some vitality in the coming months."

Irrelevant images (Photo credit: Internet)

However, not all participants in the survey are confident that a rate cut will occur.

Despite the growing consensus among economists that a rate cut is expected in July, Citibank and Morgans Financial still expect the RBA to keep rates unchanged until August.

Stephen Anthony of Macroeconomics Advisory expects the RBA to act only in November.

Some economists in the survey warned that a series of global and domestic risks could disrupt future rate cuts. Although Westpac's chief economist, Luci Ellis, expects another percentage point of monetary easing in this rate-cut cycle—equivalent to four standard rate cuts—she said that a rate cut in July is "not set in stone."

Ellis warned that if inflation pressures are more persistent than the RBA expects, the central bank may still be forced to act.

She said, "If domestic inflation pressures are significantly stronger than the RBA expects, the downward trajectory of interest rates may be blocked. This could stem from major and ongoing supply shocks both domestically and internationally. Sustained increases in energy costs could reduce the extent of policy easing or slow its pace."

Picton of Rabo said the "most direct threat" to his rate-cut outlook would be an energy price shock, if the ceasefire between Iran and Israel in the Middle East does not hold. Last month, oil prices briefly broke above $80 per barrel.

Picton also pointed out that productivity growth remains a "problem" in Australia, and if it does not improve, it may limit the extent of rate cuts.

Sally Auld, chief economist at NAB, expects the RBA to stop cutting rates once it reaches 3.1%, warning that the inflation risks from wages and a tight labor market should not be ignored.

Auld pointed out that while goods inflation has eased, services inflation driven by wages remains an outlier.

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