Private Credit Weekly Insights, 8 August 2025

Australian Economy Weekly Update — Week Ending 8 August 2025

As we approach the Reserve Bank of Australia’s (RBA) meeting on 12 August, all eyes are on the likely next step in the monetary policy cycle. The prevailing market view is for a 25-basis-point cut, taking the cash rate from 3.85% to 3.60%. The rationale is clear: inflation has now eased to the mid-point of the RBA’s 2–3% target band, and household consumption showed modest improvement in the June quarter. This alignment of disinflation and tentative spending growth provides the Board with an opportunity to support the economy without reigniting price pressures. However, this easing will occur against a backdrop of subdued growth, requiring a careful balance between stimulus and prudence.

The inflation trajectory has been the key enabler for this expected policy shift. The June quarter Consumer Price Index (CPI) printed at 2.1% year-on-year, a level not seen since early 2021. This return to target territory is a significant achievement after an extended period of elevated price growth, and it signals that the RBA’s restrictive stance over the past 18 months has been effective in anchoring inflation expectations. Importantly, the slowdown in price growth has not been confined to volatile components; underlying measures have also moved decisively lower, giving policymakers greater confidence to begin easing.

At the same time, the latest household spending data point to a mild uptick in activity. June saw consumption rise by 0.5%, following a stronger 1% increase in May. The improvement was led by goods spending—particularly on food, vehicles, and electronics—while services consumption retreated modestly, with declines in travel and health-related expenditure. On a quarterly basis, real household spending rose by 0.7% to A$217.8 billion, contributing around 0.2 percentage points to GDP growth. Annual spending growth now stands at 4.8%, the strongest pace since early 2024, suggesting that lower inflation and resilient labour markets are beginning to feed through to improved consumer sentiment.

Nevertheless, the broader growth backdrop remains soft. GDP expanded by just 0.2% in Q1, with annual growth running at 1.3%, well below trend. Business investment remains patchy, and the housing market is stabilising rather than accelerating. While employment remains relatively robust, forward indicators point to a gradual cooling in the labour market over the coming quarters. For the RBA, this mix of contained inflation, modest consumption gains, and subdued overall growth underscores the case for a cautious recalibration of policy.

A 25-basis-point cut by the RBA on 12 August appears almost fully priced in by markets, with economists anticipating at least one further reduction by year-end, potentially taking the cash rate to around 3.10% by early 2026. For households, this shift will provide incremental relief, supporting disposable income and sentiment. For credit markets, the focus will turn to how lower rates influence borrowing demand, refinancing activity, and risk pricing. While the near-term outlook is one of cautious optimism, the RBA will remain vigilant to ensure that policy easing does not undermine the hard-won gains on inflation. The challenge ahead will be to nurture growth without allowing price stability to slip from view, a balance that will define the trajectory of both the economy and credit markets into 2026.