Will the RBA cut interest rates in August? Despite ever-optimistic prediction markets, a sober look at the landscape shows that even with fresh CPI data released on Wednesday, it’s hard to tell.
While headline inflation for the year now sits at a happy-looking number, 2.1% YoY, Australia’s Trimmed Mean Inflation (TMI) read – which is our version of America’s ‘core’ inflation – sits at 2.7%.
The RBA pays more attention to TMI than headline inflation given that it doesn’t include fuel and food prices (more or less) which have the habit of distorting data through volatility.
The RBA is also tasked with looking at Australia’s unemployment rate, and cutting interest rates if that figure starts to climb too high. But so far, it isn’t, despite a recent jump upward (wherein jobs added came in far lower than expected.)
Of course, it isn’t just domestic inflation data that matters right now, either. Because this Friday evening, the White House is expected to un-pause sweeping global tariffs, and there’s talk that now Australia could be looking at tariffs up to 20%.
That will hurt America more than it hurts us, but that’s the problem: what will happen after America shoots itself in the foot remains to be seen. We don’t have a parallel in modern market history to analyse for hints about what happens in the second half of CY2025 (assuming the tariffs are unpaused at all.)
The risk is that we could be facing a second wave of inflation, and that would make it difficult for the RBA if it was to cut rates right ahead of another inflationary ‘cycle.’
Of course, to not do so would be to almost the entire country’s ire, and Michelle Bullock now has less justification to keep rates on pause again with inflation coming down.
Then again, core inflation in Australia sits at the upper end of the 2-3% target band. In my view, the odds for an August cut are a lot closer to 50/50 than what prediction markets currently think, with the data pushing bets up to 93%.
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