Australia’s Inflation Hits Multi-Year Low, Rate Cut Anticipated

Headline Consumer Price Growth Slows Sharply in Second Quarter

Australia’s key inflation gauge has fallen to its lowest point in over three years, raising expectations for a potential interest rate cut by the Reserve Bank of Australia (RBA) at its next meeting.

Inflation Momentum Cools Significantly

The nation’s headline inflation rate eased to 2.1% year-over-year in the second quarter, a decrease from the 2.4% recorded in the prior period. This figure undershot economists’ consensus forecast of 2.2% and nudged closer to the RBA’s lower target bound of 2%. On a quarterly basis, inflation growth slowed to 0.7%, down from 0.9% in the first quarter and below the 0.8% predicted by market analysts.

Data from the Australian Bureau of Statistics indicated that the primary drivers of price increases were housing, food, non-alcoholic beverages, and healthcare. However, these upward pressures were partially counterbalanced by a decline in transportation costs.

RBA Governor’s Outlook and Policy Stance

In a July 24 speech, RBA Governor Michele Bullock expressed an expectation for June quarter headline inflation to land “in the lower half of our 2%–3% target range.” She attributed this partly to the lingering effects of temporary cost-of-living relief measures.

“As that effect unwinds, we expect headline inflation to pick up to around the top of the band at the end of this year and into the first part of 2026,”

—Michele Bullock, Governor of the Reserve Bank of Australia

Despite the supportive inflation data, the RBA maintained its policy rate at 3.85% during its most recent meeting on July 8, contrary to many economists’ predictions. Minutes from that meeting revealed that board members opted to hold steady to gain further confirmation that inflation would indeed settle within their target band.

The central bank noted that certain economic indicators, including monthly inflation readings and private demand growth for the March quarter, had shown more resilience than anticipated. Furthermore, labour market conditions had not softened to the degree expected.

Economic Growth and Market Forecasts

Bank of America analysts, in a July 25 note, projected that the second-quarter inflation figures would provide sufficient justification for the RBA to implement a 25 basis point rate cut at its August meeting. They cited a weaker global growth outlook and a rise in the unemployment rate to 4.3% in June as factors increasing their confidence in a rate reduction.

Earlier in the year, Australia’s Gross Domestic Product (GDP) growth lagged expectations, expanding by 1.3% year-over-year in the first quarter of 2025, below the 1.5% forecast. Quarterly growth was a modest 0.2%, also missing the 0.4% expectation. The Australian Bureau of Statistics attributed this subdued growth to reduced public spending, weaker consumer demand, and a dip in exports.