RBA set to cut interest rate amid soft inflation and weak growth

The Reserve Bank of Australia is expected to trim the OCR by 25 bps.
RBA Governor Michele Bullock likely to address tariff concerns.
The Australian Dollar could fall to fresh multi-week lows on a dovish outcome.

The Reserve Bank of Australia (RBA) is holding a monetary policy meeting on Tuesday and is set to lower the Official Cash Rate (OCR) by 25 basis points (bps) to 3.60% from 3.85%. The July monetary policy announcement will take place on Tuesday at 04:30 GMT.

The RBA will also release the monetary policy statement, a document that details policymakers’ views on current economic conditions, and an outlook detailing what they expect for the upcoming months. Finally, RBA Governor Michele Bullock will offer a press conference.

Ahead of the announcement, the Australian Dollar (AUD) weakens against its American rival, as the US Dollar (USD) gathers demand from a risk-averse environment.

Focus on RBA’s next interest rate move

Recent growth and inflation data have been softer than expected, supporting the case for a rate cut.

The Monthly Consumer Price Index (CPI) is an annualised inflation estimate, which printed at 2.1% in May, easing from the 2.4% posted in April and below the 2.3% anticipated. The Australian Bureau of Statistics (ABS) also reported that the RBA Trimmed Mean CPI grew 2.4% on an annualised basis, softer than the previous 2.8%, and the lowest level since November 2021.

At the same time, Australia reported that the economy grew by less than expected in the first quarter of the year, advancing 1.3% year-on-year (YoY) compared to the 1.5% gain anticipated. In the three months to March, the economy expanded 0.2%, half the 0.4% expected.

Softer inflation, coupled with tepid growth, supports another interest rate cut, particularly as the RBA has maintained a cautious wait-and-see stance for much longer than any other central bank.

The third leg of the equation, the labour market, has been somewhat strong. According to the latest monthly employment report released by ABS, the Unemployment Rate held steady at 4.1%. The country lost 2.5K job positions in May, albeit the big loss came from part-time jobs, down by 41.2K, while full-time positions increased by 38.7K. The labour market strength, however, is not enough to push the Board into a wait-and-see stance.

Uncertainty about tariffs adds spice to the announcement, as well as the planned trimming. At the May meeting, policymakers debated whether to cut by 25 or 50 basis points (bps), ultimately opting for the smaller reduction. Ahead of the announcement, financial markets are also considering a modest 15 bps trim.

The expected 25 bps reduction may sound encouraging for financial markets, but it does little for households. High mortgage rates have been a key factor in the slow growth, and the cautious rate cuts delivered by the RBA have done little to boost consumption.

In the meantime, market concerns revolve around US President Donald Trump’s tariffs. US Secretary Scott Bessent stated that President Trump will send letters to some trading partners, indicating that increased levies will be implemented on August 1 if there is no progress in negotiations. Bessent added he expects to see “several big announcements over the next couple of days” about trade deals.

How will the Reserve Bank of Australia decision impact AUD/USD?

Market players will be looking for RBA Governor Michele Bullock’s words on tariffs and future monetary policy decisions. Interest rate cuts are somehow conditioned by US President Trump's tariffs, as the world fears that levies would boost inflation.

In the meantime, the AUD/USD pair trades a handful of pips above the 0.6500 mark, after falling towards 0.6482 at the beginning of the day. Easing interest rates are usually dovish and weigh on the affected currency, yet a 25 bps rate hike is fully priced in. With that in mind, the announcement itself should have a limited impact on the pair, unless the RBA goes for a larger or smaller trim. The pair could react to Bullock’s words on whatever the Board plans for the near future.

Valeria Bednarik, Chief Analyst at FXStreet, notes: “The AUD/USD pair trades with a soft tone, and regardless of the intraday bounce from fresh lows, the risk skews to the downside. Resistance comes at 0.6530, en route to the 0.6570 price zone, where sellers are likely to reappear. A slide through the intraday low exposes the 0.6440 region, while additional slides could see the pair testing the 0.6400 mark.

Bednarik adds: “Regardless of the RBA announcement and the AUD/USD pair’s initial reaction, it seems unlikely that the central bank will overshadow ongoing tariff-related concerns. Markets will return to trade on sentiment after digesting the RBA decision and quickly pricing in the next one.”

Australian Dollar FAQs

What key factors drive the Australian Dollar?

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

How does the health of the Chinese Economy impact the Australian Dollar?

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

How does the price of Iron Ore impact the Australian Dollar?

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

How does the Trade Balance impact the Australian Dollar?

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

Economic Indicator

RBA Interest Rate Decision

The Reserve Bank of Australia (RBA) announces its interest rate decision at the end of its eight scheduled meetings per year. If the RBA is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Australian Dollar (AUD). Likewise, if the RBA has a dovish view on the Australian economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for AUD.