August 2025 Interest Rate Update: Rate Cut With Inflation In Control

If you’re a home owner and haven’t already rejoiced, this week’s good news is the Reserve Bank of Australia cut the target cash rate by 25 basis points to 3.60 per cent.

Home hunters will be just as happy with their bolstered purchasing power. That said, there’s undoubtedly some underlying anxiety knowing the market competition has grown stiffer as a result of the Board’s August decision.

The RBA announcement of their unanimous decision makes the total rate reduction 75 basis points since the start of 2025. Let’s tackle the reasons behind the decision and what it might mean for the property market moving forward.

Why did the RBA cut rates in August?

Inflation playing ball

Both trimmed mean inflation (the average rise in prices after ignoring the biggest price jumps and drops to show the underlying trend) and headline inflation (the overall rise in prices across the whole economy, including everything that went up or down) are within RBA targets, respectively sitting at 2.7 per cent and 2.1 per cent.

Inflation’s 2022 peak is long behind Australia’s economy and the Reserve, in response, is laying the groundwork for a gradual easing path for the cash rate. That is in essence their words from August 12th’s Press Release. And, for those willing to read between the lines, this signals further rate drops are likely.

Domestic economy begs for rate cuts

Domestic productivity is in a weak phase, but positives are being found in household incomes rising, financial conditions easing and unemployment — despite it hitting 4.3 per cent — at very low levels.

Labour costs remain high, challenging the business environment, and some sectors can’t pass on these associated costs to clientele due to less than ideal demand. The Board notes that this might force businesses to cut investment, hiring or even staff, undoubtedly weakening the country’s labour market.

The RBA believes pushing spending could support economic growth, driving consumers to do what they do best. The best lever to pull to activate this? A rate drop like yesterday’s.

Global uncertainties

The response to global tariffs imposed by the US is starting to become clear — and the RBA is all but ruling out any extreme outcomes on a global scale. But trade policy changes are still expected to have a knock-on effect, and the consequences it’ll have on our own shores it yet to be seen.

We’ve discussed this before with regard to elections, both the US’s and our own — investors will wait to see the outcome of global-scale events before making any major decisions. So, aside from the potential demand drop for Aussie exports due to sluggish foreign economies, a delay in business investment (due to uncertainty) could dampen job creation and even innovation. In such a fast-paced global environment, that would be detrimental to Australia.

What’s the RBA likely to do next?

Policy-wise, the Reserve will forever remain cloaked in secrecy until their much-anticipated rate announcements. But that doesn’t mean they haven’t shared clues about the path forward.

While admittedly it won’t be fixed, the journey they’ve put themselves on allows for creating even more headroom for further rate cuts, with too many global uncertainties, productivity risks and business investment concerns to allow them to sit on their hands.

Inflation will be a figure to watch, and whether it moves closer to the bullseye of the RBA’s 2 to 3 per cent target will all but determine whether home owners will breath another sigh of relief with, keeping more money in their pockets.

Have the banks passed on the cuts?

These days, there’s rarely a major delay in the Big Four banks passing on rate cuts (a result of saving face in front of a highly scrutinous public).

Variable mortgages held with CBA, ANZ, NAB and Westpac will all be reduced by the full 25 basis points, rolled out on 22 August (CBA and ANZ), 25 August (NAB) and 26 August (Westpac).

Why do the banks delay their cuts until later in the month? In particular NAB and Westpac being even later in August? It comes down to numbers. Big ones.

The Big Four make around $7.6 million in interest per day. That’s around $2 million per bank. So, regardless of the profits being at their borrower’s expense, the banks can claim significant margins for each day they delay a rate cut.

During a cost of living squeeze, delaying passing their cuts isn’t perhaps the ideal message to send to customers. But when household expenditure is at such high levels — and without the income to alleviate the stress of high outgoings — perhaps many Aussie homeowners are simply too relieved with a decrease in their mortgage obligations to care about the precise date that drop occurs, whether that’s today or in two weeks’ time.

Will we see further rate cuts in 2025?

As the RBA have alluded, there’s a high potential for further cash rate decreases. When? That, of course, depends.

The signs to watch will be domestic productivity, global tailwinds, export figures and the usual economic indicators (wage growth, consumer spending and employment/unemployment figures). And the good news for you, is you don’t need to watch them yourself. We’ll do it for you.

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