In our August 2025 economic update, we examine the month’s biggest story – the reduction of the official cash rate by the Reserve Bank of Australia (RBA), and the rationale behind the RBA’s outlook.
Australia’s underlying inflation green lights RBA rate cut
After a false start last month, the overwhelming market consensus proved correct in August as the RBA cut the official cash rate by 25 basis points to 3.60%.
In our previous economic update, we noted that the RBA’s decision to defy expectations and hold rates steady in July centred on inflationary figures. Namely, the RBA’s desire to wait for the quarterly underlying inflation reading, rather than relying on monthly CPI data.
Australia’s underlying inflation was 2.7% over the year to 30 June 2025. This was lower than the 2.9% reported for the year to 31 March 2025, and largely in line with market expectations. It also marked the lowest reading since the December 2021 quarter.
Underlying inflation is forecast to continue moving further inside the RBA’s 2% to 3% target range, over the remainder of the year.
Each of the ‘big four’ banks tip a November rate cut of 25 basis points. Moving into 2026, Westpac is calling a further two 25 basis point cuts prior to the end of May, while NAB believe a February cut is on the cards. ANZ expects a November cut will be the final easing before 2027, and Commonwealth Bank are yet to look beyond 2025.
RBA downwardly revises productivity outlook
In its August Statement on Monetary Policy, the RBA downgraded its outlook for Australia’s productivity growth, reducing its medium-term assumption for labour productivity growth from 1.0% to 0.7% per annum.
The revision reflects ‘consistently weaker-than-expected productivity growth’ as a result of persistent challenges such as declining business dynamism and competition, slower technological diffusion, reduced capital deepening (less investment in tools and infrastructure per worker) and regulatory barriers in key sectors like construction. The growing share of low-productivity sectors such as health and education have further dragged down aggregate productivity.
Productivity growth occurs when more units of output are delivered for each unit of input. Low productivity growth directly restricts overall economic output, which limits economic growth. However, it also restricts wage growth, which in turn restricts consumption growth, which also stunts overall economic growth.
This compound effect of low productivity growth can significantly slow the pace of economic expansion, which is why the RBA follows these statistics so closely. While inflation and unemployment (currently 4.2%) forecasts remain positive, the RBA has signalled that weaker productivity will negatively impact both private consumption and government spending.
This outlook is consistent with many other advanced economies. The RBA’s interest rate easing cycle is likely to support demand amid these structural headwinds, meaning it is probable further cuts will follow in the near term.
Constrained housing supply gives continued rise to home prices
According to Cotality’s Home Value Index, national dwelling prices rose by 0.6% in July, marking the sixth consecutive month of growth. Each capital city recorded a rise in dwelling values, led by Darwin (2.2%), Perth (0.9%) and Brisbane (0.7%).
Private house approvals fell 2.0% month-on-month in June 2025, following a 1.0% decline in May. Queensland (-6.3%) marked the largest monthly decline, followed by South Australia (-2.6%) and New South Wales (-2.4%).
More broadly, however, total dwelling approvals increased 11.9% month-on-month in June, which followed a 2.2% increase in May.
Global trends
Uncertainty in the world economy remains elevated. While there is somewhat more clarity surrounding the United States’ tariffs, particularly that the extreme outcomes initially anticipated now appear unlikely, trade policy developments may still adversely affect global economic activity.
Additionally, central banks globally continue to walk the tightrope, balancing softer growth trajectories against still elevated, albeit easing, inflation.
As always, opportunities continue to present themselves across Australia’s mixed economy. Trilogy Funds will continue to adopt a selective and risk-aware approach to deliver for its investors, executing on opportunities as they arise.
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