Cash rate could fall to 3.1% by next year, says economist
The Reserve Bank of Australia (RBA) is likely to make two more interest rate cuts this year as the economy shows signs of subdued growth, according to a bank economist.
“As the RBA puts global factors such as trade wars firmly in its sights, we can expect to see two more cash rate cuts this year – a drop of 25 basis points per quarter,” Bendigo Bank chief economist David Robertson (pictured above) said in the bank’s latest economic update. “There is also potential for one more cut next year, which would take the cash rate to a neutral 3.1%.”
The Reserve Bank of Australia held back from a larger rate cut in May due to a delay in US tariffs that had been proposed earlier in the year. “Had US tariffs remained at the shocking levels proposed in early April, we would have seen a half a percent cut by the RBA in May,” Robertson said. The more moderate trade environment allowed the central bank to make a standard 0.25% reduction instead.
Market sentiment has strengthened on the outlook for further rate cuts, with the ASX200 now trading within 1% of its record high set in February. Robertson said Australia’s limited exposure to global trade tensions has helped shield its equities from sharper volatility.
Australia’s economy expanded by just 0.2% in the first quarter of 2025, bringing annual GDP growth to 1.3%. Robertson said this confirmed that the economy still needed support and justified less restrictive monetary policy.
“While the economy is still growing, once again our productivity rate failed to lift, down 1% over the year,” he said. “It gives the returned ALP government a timely reminder of the imperative of addressing this long-standing issue of underperforming productivity – the primary driver of lifting standards of living.”
National home values rose 0.5% in May, driven by low interest rates and a shortfall in new housing supply. Perth, Brisbane, Darwin and many regional areas recorded the strongest gains.
Meanwhile, GDP data pointed to a fall in public sector spending, offset by a 0.75% increase in private investment. The quarter also saw disruptions in mining, shipping and tourism due to severe weather, highlighting the growing economic risks linked to climate change.
“In FY26, we expect economic growth here to gradually pick up to almost 2%, but droughts in the south and recent floods in NSW clearly add to challenges of maintaining a steady trajectory,” Robertson said.
The economist noted that while the rollback of US tariff threats had allowed the RBA to conserve rate-cutting capacity, the broader global outlook remained uncertain.
“The fact that US tariffs are now ‘only’ around 14% compared to double that number threatened on April 2 is good news,” Robertson said. “It leaves the US now with a similar level of tariffs to where they were in the 1930s – the worst decade economically in modern history.”
He warned that escalating trade tensions could limit growth globally, pushing central banks toward lower interest rates. “Those countries that are imposing tariffs will add inflation to their economies and so may limit the extent of their rate cuts,” he said.
Robertson added that while financial markets have responded positively to recent developments, concerns about stagflation in the US and rising bond yields suggest that volatility is likely to remain elevated.
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