RBA Monitor: Only a 25bp hawkish cut will be delivered in August

The fight against inflation seems to have been finally, at least so far, opening the door for the Reserve Bank of Australia (RBA) to ease at the policy meeting on August 12th. In fact, the trimmed mean, a measure of underlying inflation, decelerated from +2.9% YoY in Q1-25 to +2.7% YoY in Q2-25 (Chart 1).  This is still slightly higher than the RBA’s forecast of +2.6% YoY on the May Statement on Monetary Policy but there is more evidence to inflation finally stabilizing at the RBA’s desired level. Namely, underlying inflation softened from +0.7% QoQ to +0.6% QoQ during the same period, suggesting that inflation is stabilizing within the 2-3% target range.Moreover, services CPI inflation decelerated from +3.7% YoY in Q1-25 to +3.3% YoY in Q2-25 (Chart 1). This suggests that the labor market is cooling gradually. Actually, the unemployment rate rose from 4.1% in May to 4.3% in June, which is in line with the RBA’s forecast.While these developments are expected to support a rate cut at the next meeting, Governor Bullock is likely to keep a cautious stance, potentially emphasizing data dependency. In fact, the unemployment rate is still below the natural rate of unemployment estimated between 4.5% and 5.0% by the Australian Treasury and consumer inflation expectation picked up to +5.0% YoY in Q2-25 (Chart 2). Hence, a more dovish stance by the Governor could end up re-igniting inflation pressure.At the same time, it is questionable how long the RBA could keep its cautious approach. If the Fed respond to weaker labor market by easing earlier than expected, a stronger Aussie could weaken the Australian economy and further soften inflation pressure, which could lead to additional cuts by the Reserve Bank.Nevertheless, for the August meeting, the RBA is expected to lower the cash rate by 25 bps to 3.60% but the message from the Governor Bullock will not be dovish so as to continue to anchor inflation expectations.