CFO Pulse > July 2025

Interest rate cutting cycle paused despite lower inflation

Confirmation of on-target inflation and further evidence of a sluggish pace of economic growth was not enough for the RBA to lower interest rates at its 8 July meeting. It left official interest rates at 3.85 per cent, just 50 basis points down from the peak.

The RBA Governor noted uncertainty around the inflation outlook as a critical reason behind the decision not to validate market pricing for a 25 basis point cut.

Post the decision, financial markets scaled back expectations for future interest rate cuts with the cash rate priced to fall to around 3.0 per cent during the first half of 2026.

Global factors, the escalating trade and tariff stoush and geopolitical ructions in particular, continue to present downside risks to the global growth outlook. Weaker international trade is a negative factor for the global economy and that will impact countries such as Australia and New Zealand, both of which have high profile export sectors.

Tariffs and US fiscal policy are dominating global economic sentiment. Growth is slowing and the major central banks are either on hold or continuing their interest rate cutting cycles, most of which began in 2024. The main market reaction to US policy turmoil is a sharply weaker US dollar which has fallen more than 10 per cent on a trade weighted basis since early 2025.

Australia

The economic data flow over the past month in Australia was highlighted by favourable inflation data. Annual inflation was 2.1 per cent in May, with the underlying or trimmed mean measure at a three and a half year low of 2.4 per cent. In delivering the most recent interest rate cut, the RBA expressed growing confidence that inflation would remain near the mid-point of its 2 to 3 per cent target over the forecast horizon.

Partial economic indicators confirmed only modest growth in household spending, a disappointing pull back in new dwelling building approvals and general cautiousness in consumer sentiment and business confidence. Current forecasts for June quarter GDP growth (released 3 September) are centred around just 0.4 per cent with annual growth remaining at a sub-par 1.5 per cent. This is well below the pace considered ‘trend’ which is estimated to be 2.5 to 2.75 per cent.

Despite the persistent moderate pace of economic growth, the unemployment rate remains relatively low at 4.1 per cent. This is broadly steady despite signs of weakness in job vacancies and advertisements. Wages growth remains well contained, with annual growth of 3.4 per cent which is below the 2024 peak of 4.3 per cent and now at a pace consistent with the RBA inflation target.

New Zealand

There are further signs of an economic recovery in New Zealand with GDP rising 0.8 per cent in the March quarter which followed a 0.5 per cent increase in the December quarter. The impact of sizeable interest rate cuts from the RBNZ are driving the recovery. That said, the labour market continues to lag with the unemployment rate holding at a four year high of 5.1 per cent.  The unemployment rate was as low as 3.2 per cent in 2022.

The RBNZ has cut interest rates by a total of 225 basis points since the peak of 5.50 per cent in 2024. Annual inflation remained at 2.5 per cent in the March quarter, locking in three straight quarters where inflation has been at or below 2.5 per cent. With the domestic economic recovery gaining traction, markets are starting to price in a high probability that the RBNZ interest rate cutting cycle is at or near an end.

Currencies

Despite the volatile global economic and geopolitical environment, the AUD and NZD have traded in relatively tight ranges. The AUD had been tracking close to 65 US cents with the NZD broadly steady around 60 US cents. Since the start of 2025, both currencies have weakened against the EUR, CAD and GBP.