In the Trilogy Funds July 2025 economic update, we unpack the Reserve Bank of Australia’s unexpected decision to hold the official cash rate at 3.85% at their 8 July 2025 Board meeting. We also touch on Australia’s moderating inflation, tariffs returning to the fore, and Australia’s house prices continuing their upward trajectory.
Reserve Bank of Australia defies expectations, inflation takes centre stage again
Many considered it a certainty, with financial markets pricing in a 96% chance of a rate cut when the Reserve Bank of Australia (RBA) Board met on 7 to 8 July 2025.
ANZ economists, for example, had revised their forecast for a rate cut in from August to July due to soft retail sales data and stalled consumer confidence, as well as global uncertainty. ANZ changing their tune meant each of the ‘big four’ banks had forecast a July rate cut.
As such, the 8 July 2025 announcement that the RBA decided to leave the official cash rate target unchanged at 3.85% was notably unexpected.
But why?
Inflation was a key driver in the RBA’s decision. Namely, the Board’s reluctance to rely on the monthly consumer price index (CPI) indicator and instead opting to wait for the trimmed mean inflation reading for the year to 30 June 2025, which releases on 30 July.
Trimmed mean inflation is a more relevant measure to the RBA, given it reflects more persistent inflationary pressures when compared to the monthly CPI indicator.
Australia’s monthly CPI increased by 2.1% in May 2025, which eased from the 2.4% increase in April and came in lower than the 2.3% forecast. In their statement on the 8 July 2025 monetary policy decision, the RBA Board noted that this CPI indicator suggests that June quarter trimmed mean inflation is likely to be broadly in line with forecasts (2.6% according to Trading Economics).
The RBA’s statement also noted that with ‘the cash rate 50 basis points lower than five months ago and economic conditions evolving broadly as expected, the Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5% on a sustainable basis.’
Former RBA Assistant Governor and current Chief Economist of Westpac, Luci Ellis, believes this approach runs the risk of the RBA falling ‘behind the curve’.
However, RBA Governor, Michelle Bullock, argued that the June 2025 trimmed mean inflation figures are expected to validate the Board’s easing path, while also emphasising that monetary policy remains positioned to respond effectively should any global volatility impact Australia.
The RBA Board next meets on 11 and 12 August, after the 30 June 2025 trimmed mean inflation figures are released. The market is currently pricing in an 85% chance of a 25 basis point rate cut at that meeting.
Tariffs remain front of mind
Tariffs remain a concern at a global level, with United States President Donald Trump issuing a new round of letters to the leaders of more than a dozen countries, outlining new trade levies. The new tariffs are either the same or only marginally different to the original ‘Liberation Day’ tariffs for the most part, but appear designed to encourage leaders to reach out to the United States to negotiate a deal.
At this stage, Australia has yet to receive a letter, with the 10% ‘baseline tariff’ still in effect. However, two of Australia’s largest trade partners, Japan and South Korea, were recipients of a letter from President Trump. South Korea has been threatened with a sweeping 25% tariff (unchanged from Liberation Day), while Japan faces a 25% levy (an increase on the 24% Liberation Day tariff).
If these two nations are unable to negotiate a trade deal with the United States, it will likely mean they redirect capital flows elsewhere. While most pronounced with South Korea and Japan, a shifting global trade landscape may be beneficial to Australia.
In a recently released report titled ‘Trade and Assistance Review 2023-24’, the Australian Government’s Productivity Commission indicated that over the long term, the direct impact on Australia of President Trump’s tariff changes are likely to be small and positive. The reports states that ‘cheaper imports from the rest of the world, and an outflow of productive capital from the US and high-tariffed economies, would stimulate Australian production.’
The Productivity Commission’s modelling indicates a potential 0.37% uplift in Australia’s economic output, as measured by gross domestic product.
House prices, building permits continue to rise
The Cotality Home Value Index increased 0.6% month-on-month in June. This marked the strongest increase since June 2024, and was driven largely by the market sentiment around falling interest rates. Perth (0.8%) and Brisbane (0.7%) saw the largest monthly increases in home prices, followed by Sydney (0.6%), Adelaide (0.5%) and Melbourne (0.5%).
Private house approvals in Australia rose 0.5% month-on-month to an eight-month high. This was largely riding the coattails of April’s 5.9%, which marked the largest single month increase since February 2021.
More broadly, total dwellings approved in Australia rose 3.2% month-on-month in May 2025 to 15,212 units. This is a rebound from the 4.1% drop in April and marks the first positive month since January 2025.
Green shoots are emerging in Australia’s economy, with opportunities appearing both domestically and abroad. As always, Trilogy Funds will continue to explore attractive risk-adjusted opportunities as they arise.
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