In short:

The Reserve Bank cut interest rates by 0.25 percentage points in August to 3.6 per cent, after July’s shock ‘on hold’ decision.

The average owner-occupier with a $750,000 mortgage as of February will see their minimum monthly repayment fall $111 if their bank passes on the cut, taking the cumulative reduction this year to $340, according to Canstar.

What’s next?

The next RBA rates decision will be delivered on September 30. After that, there are two further meetings this year, in November and December.

The Reserve Bank has delivered its third interest rate cut of 2025, with a 0.25 percentage point reduction at its August board meeting.

That takes the cash rate to 3.6 per cent for the first time since April 2023.

The move had been overwhelmingly anticipated by financial markets and economists after the surprise decision to hold rates steady in July.

It was a unanimous decision by board, which had been divided last month.

Tuesday’s cut follows a further easing of inflation in the June quarter, which RBA governor Michele Bullock last month highlighted as the crucial piece of data the monetary policy board was waiting for.

“Updated staff forecasts for the August meeting suggest that underlying inflation will continue to moderate to around the midpoint of the 2–3 per cent range, with the cash rate assumed to follow a gradual easing path”, the post-meeting statement read.

ABC News / Source: Reserve Bank of Australia

The inflation pull back, alongside “labour market conditions easing slightly, as expected”, led the board to deem “further easing of monetary policy was appropriate”.

“This takes the decline in the cash rate since the beginning of the year to 75 basis points”, the RBA board noted in its statement.

The central bank cut interest rates at its February and May board meetings.

Before that, the RBA’s cash rate had sat at 4.35 per cent since November 2023, after a series of 13 rate hikes, beginning in May 2022.

Treasurer Jim Chalmers described it as a “very welcome relief for millions of Australians”.

“It means the lowest interest rates for more than two years”, he said shortly after the decision.

“It reflects the substantial and sustained progress we’ve made on inflation in a volatile and uncertain global environment”, the treasurer noted in a statement.

Cash rate at 3.6pc, further rate cuts expected

The Australian dollar fell following the decision, dipping just below 65 US cents as Ms Bullock addressed a media conference in Sydney.

The RBA governor indicated the board was prepared to cut interest rates further if necessary.

“The forecasts imply that the cash rate might need to be a bit lower than it is today to keep inflation low and stable, and employment growing, but there is still a lot of uncertainty”, Ms Bullock told reporters.

“The board will continue to focus on the data to guide its policy response”.

Where are rates heading?

The Reserve Bank’s economic outlook suggests further room to cut interest rates, but it’s not all good news for most working-age Australians.

Betashares chief economist, David Bassanese has forecast further interest rate cuts, with the next easing more likely in November, rather than at the next meeting in September.

“Indeed, the [central] bank’s own forecasts of underlying inflation stabilising at 2.6 per cent over coming quarters incorporate further declines in the cash rate in line with current market expectations”, he wrote.

“That said, barring a major growth scare, the RBA does not seem in any rush to cut interest rates.

“All up, my base case remains that a rate cut on Melbourne Cup day is an odds on favourite –following release of the June quarter consumer price index report in late October”.

The governor would not be drawn on what specific cash rate the central bank considers to be “neutral” – that is, the level where the rate is not stimulating or putting a handbrake on the economy.

Instead, she gave a “very wide range” of between 1 and 4 per cent, and noted a neutral rate is for when there is an absence of economic shocks.

“We are very often not in the absence of shocks … we’ve got shocks, particularly at the moment”.

While the central bank’s forecasts put inflation around target over the period ahead, it has downgraded its growth forecasts.

It now expects gross domestic product (GDP) expanded 1.6 per cent over the year to June (compared to 1.8 per cent forecast in May); and GDP growth to only pick up to 1.7 per cent by the end of the year (it had previously forecast 2.1 per cent).

“Its forecasts assume that the cash rate will continue to ‘follow a gradual easing path’, implying that without further easing growth and inflation will be lower and unemployment higher”, AMP chief economist, Shane Oliver said.

AMP has forecast further rate cuts in November, February and May to take the cash rate to 2.85 per cent.

“We continue to see further rate cuts as growth remains sub par, the risks to unemployment are on the upside, underlying inflation is likely to remain around the 2.5 per cent target and monetary policy remains tight”, Dr Oliver wrote.

How much will home loan repayments fall?

Some lenders were quick off the mark to confirm they would be passing on the interest rate cut to home loan customers, with Macquarie, Commonwealth Bank, Westpac, ANZ, NAB and AMP among the first handful of announcements.

The cumulative effect of three rate cuts so far this year have added up to a substantial reduction in minimum mortgage repayments for many home loan borrowers.

According to calculations by financial comparison site Canstar, the savings from this month’s cut range from $74 on a half a million dollar mortgage, to $148 on a $1 million home loan.

Based on an owner-occupier paying principal and interest with 25 years remaining in Feb 2025 at the RBA average existing customer variable rate. Calculations assume the banks pass on each cut in full to existing variable customers the month after.

Source: Canstar.com.au

The numbers are based on an owner-occupier repaying principal and interest, who had 25 years remaining on their loan in February.

The estimates assume borrowers were paying the average variable rate of 5.79 per cent, which would fall to 5.54 per cent  after Tuesday’s 0.25 percentage point cut, and that lenders pass on cuts in full to existing variable customers the following month.

Home loan borrowers are not obliged to lower repayments, and, in fact, most do not – last month, Commonwealth Bank released data showing only one in 10 eligible home loan customers reduced their mortgage direct debits after the rate cut in May.

If borrowers continue to make repayments above the minimum required, they will pay down more of the principal as the interest reduces, and pay off their loan faster.

Source: ABC News