Aussie home borrowers have been given some more relief with the Reserve Bank cutting interest rates again for the third time this year. 

The Reserve Bank of Australia (RBA) has decreased the cash rate by 25 basis points, bringing it down to 3.6 percent for the first time since May 2023, following a unanimous decision by the nine-member monetary policy board.

The latest cut means a borrower with an average, $660,000 mortgage will save $106 on their monthly home loan repayments.

This followed relief in February and May, and avoided a repeat of July when the Reserve Bank left rates on hold – surprising financial markets. 

The likelihood of a rate reduction increased on Tuesday afternoon after underlying inflation for the June quarter dropped to 2.7 percent, nearing the midpoint of the RBA’s target range of two to three percent.

Reserve Bank Governor Michele Bullock said the RBA was now expecting underlying inflation ‘to remain sustainably’ in the middle of its target range.

“The forecasts suggest that the cash rate may need to be slightly lower than it is currently to maintain low and stable inflation and support employment growth,” she mentioned to reporters in Sydney.

The main inflation rate at 2.1 percent also hit a four-year low, aided by the $75 quarterly electricity rebates that are extended until the end of 2025.

Australian homeowners have received additional financial relief as the Reserve Bank has cut interest rates again for the third instance this year (depicted is Pitt Street Mall in Sydney).

Reserve Bank Governor Michele Bullock indicated that the RBA now expects underlying inflation to “remain sustainably” within the middle of its two to three percent target range.

But Ms Bullock confirmed a larger, 50 basis point rate cut wasn’t discussed at the two-day meeting. 

‘All board members were fully behind 25 basis points,’ she said. 

The latest rate cut was in line with futures market expectations, which are also expecting two more rate cuts in 2025 that would take the cash rate back to 3.1 per cent for the first time since February 2023.

The RBA’s Statement on Monetary Policy for August, released on Tuesday, had a cash rate assumption of 3.1 per cent by June 2026.

The 75 basis points of rate cuts since the start of 2025 mark the most generous monetary policy easing since the start of the Covid pandemic in March 2020. 

New RBA forecasts had underlying inflation, without volatile price movements, staying at 2.6 per cent into 2026 – making more rate cuts likely.

‘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 RBA monetary policy board said on Tuesday.

‘With underlying inflation continuing to decline back towards the midpoint of the 2–3 per cent range and labour market conditions easing slightly, as expected, the board judged that a further easing of monetary policy was appropriate.’

The RBA has cut the cash rate by another 25 basis points, taking it back to 3.6 per cent for the first time since May 2023

But the Reserve Bank had headline inflation climbing back to three per cent by December, up from 2.1 per cent now, following the expiry of the $75 quarterly electricity rebates. 

Treasurer Jim Chalmers said the third rate cut in six months was ‘welcome relief for millions of Australians’.

‘This interest rate cut will make a meaningful difference to millions of mortgage holders around the country. It will put more money in the pockets of people under pressure,’ he said.

The Commonwealth Bank, Australia’s biggest home lender, became the first of the Big Four banks to move on its variable rate mortgages, with the latest quarter of a percentage point cut to be effective on August 22. 

Westpac followed soon after, with its mortgage reductions coming into effect on August 26. 

The Reserve Bank hinted it could embark on deeper cuts should Donald Trump’s tariffs worsen global trade.

‘It noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia,’ it said.

‘Uncertainty in the world economy remains elevated. There is a little more clarity on the scope and scale of US tariffs and policy responses in other countries, suggesting that more extreme outcomes are likely to be avoided. 

The latest cut means a borrower with an average, $660,000 mortgage will save $106 on their monthly home loan repayments (pictured are Brisbane houses)

‘Trade policy developments are nevertheless still expected to have an adverse effect on global economic activity, and there remains a risk that households and firms delay expenditure pending still greater clarity on the outlook.’

The 75 basis points of cuts in 2025 have only partially undone the 425 basis points of hikes in 2022 and 2023, with 13 RBA moves.

Australia’s unemployment rate of 4.3 per cent, while low, is still at a near four-year high. 

‘Various indicators suggest that labour market conditions remain a little tight, although have eased further in recent months,’ the RBA said.

‘Measures of labour underutilisation nevertheless remain at low rates and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers.’ 

While inflation is moderating, the Reserve Bank is worried that weak productivity could still push up wage costs and revive inflationary pressures.

‘Looking through quarterly volatility, wages growth has eased from its peak but productivity growth has not picked up and growth in unit labour costs remains high,’ the RBA said.

‘There are uncertainties about the outlook for domestic economic activity and inflation stemming from both domestic and international developments.’

The latest cut will see monthly repayments on an average, $660,000 fall by $106 to $3,975. 

But in a sign Australia’s productivity crisis is far from over, the Reserve Bank’s latest report also noted businesses were concerned about the cost of implementing AI.

‘Many firms also flagged the ongoing fast pace of growth in software prices as a challenge to fully capturing productivity gains from new technology investments,’ it said.

‘Further, firms noted that more staff may be needed to facilitate the adoption of technology, particularly in the transition phase. 

‘Although there remains considerable uncertainty around the potential impacts of AI, most survey participants anticipated that such technologies will be labour saving in the future and that AI will facilitate a change in their workforce from lower to more highly skilled roles.’