Minutes of the Monetary Policy Board Meeting

Sydney – 11 and 12 August 2025

Members present

Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor and Deputy Chair), Marnie Baker AM, Renée Fry-McKibbin, Ian Harper AO, Carolyn Hewson AO, Iain Ross AO, Alison Watkins AM, Jenny Wilkinson PSM

Others present

Sarah Hunter (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets)

Anthony Dickman (Secretary), David Norman (Deputy Secretary)

Meredith Beechey Osterholm (Head, Monetary Policy Strategy), Sally Cray (Chief Communications Officer), David Jacobs (Head, Domestic Markets Department), Michael Plumb (Head, Economic Analysis Department), Penelope Smith (Head, International Department)

Brad Jones (Assistant Governor, Financial System), Andrea Brischetto (Head, Financial Stability Department) and James Bishop (Senior Manager, Financial Stability Department), for discussion of the item on macroprudential policy advice

Financial conditions

Members commenced their discussion of international financial conditions with the observation that prices of risky financial assets had remained buoyant, despite continued elevated uncertainty over future tariff policies and the global economic outlook. Equity prices had reached new highs, and equity risk premia and corporate bond spreads remained low, including in Australia. Members noted that it was possible these developments could be justified by fundamentals, including: company earnings reports having generally been positive; fiscal policy settings being broadly supportive of economic activity (particularly in the United States); retaliation against US tariffs having been somewhat lower than initially feared; and a recognition that global monetary policy could provide further support to economic activity if needed. However, an alternative view was that financial markets were too sanguine about risks. If so, sufficiently material or persistent news that contradicted the benign outlook currently priced in by financial markets could trigger heightened risk aversion and a sharp correction in asset prices.

Members noted that market participants expected further monetary policy easing in several developed economies, including the United States, the United Kingdom and Australia. In the United States, inflation had remained stable and unemployment was still close to historical lows despite a recent slowing in employment growth. However, tariff and immigration policies and fiscal settings were creating various risks to US inflation and unemployment, at least in the near term. Meanwhile, the Bank of England had reduced its policy rate in August and signalled a gradual and careful approach to further easing, amid upward revisions to its inflation and near-term unemployment forecasts. By contrast, central banks in the euro area, Canada and New Zealand had already reduced interest rates significantly and markets were pricing in only limited further easing by these central banks.

In sovereign bond markets in advanced economies, 10-year bond yields had remained broadly unchanged over the previous 12 months, despite some shorter term volatility. However, 30-year bond yields had gradually trended higher in several economies – including the United States, Germany, the United Kingdom and Japan. This was consistent with term premia rising in response to prospects for large deficits adding to already-high levels of public debt in some of these economies.

The RBA’s commodity price index had been little changed overall since the July meeting, despite some movements in the index’s components, including in response to shifting tariff policies. Gold prices had increased further and remained at very high levels. Iron ore prices had declined slightly, following earlier supply disruptions in Australia and Brazil, but remained higher than at the start of April. Oil and base metals prices had risen modestly. Members noted that base metals prices historically had been a useful guide to the near-term outlook for global industrial production.

The Australian dollar exchange rate had been little changed on a trade-weighted basis since the May meeting and was broadly in line with its typical relationship with interest rate differentials and commodity prices. Members acknowledged that there were many influences on the exchange rate and that there was no reason to believe the contribution from lower interest rates in Australia differed from what is typically the case.

Members noted that the easing of monetary policy in Australia had also been affecting other determinants of domestic financial conditions as expected. The decline in the cash rate had been passed through to interest rates for households and businesses. As a result, households’ scheduled mortgage payments (as a share of disposable income) had declined from their earlier peak and would decline further into next year if the cash rate were to follow market expectations. Members noted that scheduled mortgage payments were nevertheless projected to remain somewhat higher than in the past, reflecting both a higher level of debt relative to household incomes and a market path for the cash rate that remained well above historical lows. Households’ extra payments into their offset and redraw accounts had also declined a little as a share of household disposable income, consistent with the easing in interest rates.

Growth in household credit had picked up further, alongside a lift in housing market activity. Household credit was now growing at a similar pace to household disposable income, having risen more slowly than household incomes over the prior two or three years, when monetary policy was more restrictive. Commitments for new housing loans had risen since the cash rate was first reduced in February, but were not yet at a level that historically would have signalled a significant further rise in credit growth. Growth in business credit had continued to outpace growth in GDP.

Members discussed conditions facing smaller businesses, drawing on private surveys and insights from the RBA’s 33rd annual Small Business Finance Advisory Panel in July, which were due to be published in an upcoming Bulletin article. Increased lending competition among both banks and non-banks had improved the availability of financing. However, surveyed business conditions for small businesses remained weaker than those for large businesses, and panellists noted that profit margins had been squeezed by strong growth in labour and other costs in recent years.

Market expectations for the path of the cash rate were slightly below their level ahead of the May meeting, but a little higher than had been the case prior to the July meeting. Market participants were anticipating a 25-basis point cut at the current meeting, with two further cuts by early 2026.

International economic conditions

Turning to international economic conditions, members noted that trade policy uncertainty had declined somewhat over preceding months but remained significant. While the most recently announced US tariff rates were higher than had been assumed in the May Statement on Monetary Policy, retaliation by other jurisdictions had been limited and the United States had announced that it had reached tariff agreements with some of its largest trading partners. Global GDP growth had so far proved resilient to trade policy developments over the first half of the year, and global trade flows – most prominently with China – had been redirected quite rapidly. Reflecting these developments, members assessed that the risks to the global growth outlook from higher US tariffs were still tilted to the downside, but the more extreme downside scenarios were now seen as less likely to materialise.

GDP growth in Australia’s major trading partners was still expected to slow over the second half of 2025 and into 2026 as higher tariffs and broader policy uncertainty weigh on global activity. This central outlook was largely unchanged from the May baseline forecast. The impact of US tariffs on economic growth was expected to be concentrated largely in the United States. Members discussed the extent to which US trade and other policy changes could also weigh on longer run growth in US potential output. By contrast, medium-term growth in Australia’s other trading partners was expected to slow to a lesser extent, supported by adjustments in trade flows, stimulatory fiscal policy in some economies and less-restrictive monetary policy. Members discussed whether it was plausible to assume that the effects of sharply higher US tariffs might be mostly contained to North American economies. A change of this nature historically would also have had major implications for east Asian economies. However, there was not yet evidence that a material share of the cost of US tariffs was being paid by Asian exporters, and there were reasons to believe that the region may be capable of sustaining economic growth in the face of weaker US growth.

Near-term output growth in China was expected to remain relatively resilient. Fiscal stimulus was already supporting growth, and the staff assessed that the Chinese authorities would expand stimulus further if required to mitigate adverse effects from higher tariffs or ongoing weakness in the Chinese property sector.

Domestic economic conditions

Members noted that recent international developments had thus far had little discernible adverse effects on domestic economic conditions. Forward-looking indicators from consumer and business surveys had been resilient, in contrast to the sharp falls observed initially in other developed economies. Given the typical lags, any effects of increased trade policy uncertainty on spending were expected to become evident only from late 2025 and, even then, were expected to be modest. Members noted the staff’s assessment that global trade policy developments were likely to have a modest disinflationary effect on Australian import prices.

Taken together, data on economic activity and inflation since the May Statement on Monetary Policy had been broadly in line with the staff’s expectations. The updated forecasts suggested that supply and demand in the labour market – and the economy more broadly – were expected to be close to balance over the forecast period, and that inflation was expected to return to around the midpoint of the 2–3 per cent target range.

The gradual recovery in year-ended GDP growth observed in the March quarter was expected to continue, driven by an ongoing lift in private demand and supported by growth in public demand. The pick-up in GDP growth over the remainder of 2025 was, however, expected to be more gradual than previously forecast, given an expectation that most of the weaker-than-expected outcomes for public demand earlier in the year would not be recouped. Consistent with market pricing, the forecasts assumed a cumulative 80 basis points of further easing in the cash rate over the coming year, including an expected reduction at this meeting. Members considered how the past and expected easing in monetary policy might be affecting housing market conditions. They concluded that increases in housing prices were so far within the expected range based on previous easing cycles. Dwelling investment was showing clear signs of strengthening.

The staff’s forecasts for GDP growth in the medium term had been reduced a little because of a lower assumed rate of productivity growth to which the economy would return by the end of the forecast period. This downgrade, described in detail in a dedicated chapter of the August Statement on Monetary Policy, reflected the staff’s assessment that some of the headwinds that had lowered productivity growth over the preceding decade or two were likely to persist over the coming two years. Members discussed the implications of the changed productivity growth assumption for other components of the forecasts. It implied that the economy’s supply capacity was expected to be commensurately lower over the forecast period; the forecasts for growth in wages and incomes had also been revised down in line with historical relationships with productivity growth. Members noted the staff’s judgement that, because lower productivity growth was associated with lower growth in both potential supply and aggregate demand, this did not change their assessment of current or future spare capacity, nor of domestic inflationary pressures.

Turning to the labour market, members noted that conditions had eased a little over preceding months, in line with the staff forecasts. The unemployment rate had increased to 4.3 per cent in June and was expected to stay around that level over the forecast period. Employment growth had been subdued in May and June. Members discussed how much signal to take from this, and how likely it was that the expected slower growth of non-market sector employment over the forecast period would be absorbed by faster market sector employment growth and less rapid growth in labour supply. They observed that other indicators had been more resilient. The participation rate and employment-to-population ratio remained around historical highs. And leading indicators such as job advertisements and vacancies had also been little changed in preceding months and pointed to stable labour market conditions in the near term.

Members discussed the assessment that some tightness in labour market conditions remained, noting the associated uncertainty. A range of indicators supported that judgement, namely: the ratio of job vacancies to unemployed workers was still somewhat high; firms continued to report some difficulty finding labour; the underemployment rate and hours-based measure of labour underutilisation had been little changed at low levels; and growth in unit labour costs remained high. Members noted that some other indicators were consistent with more balanced conditions in the labour market. For instance, there had been a small increase in the unemployment rate in June – including an increase in the rates of youth unemployment and medium-term unemployment – and the rate of job-switching had been subdued for some time. Wages growth had also been trending down in year-ended terms, though recent quarterly outcomes had been relatively stable at rates slightly above what the staff assessed to be consistent with balance in the labour market. The staff expected only a slight easing in quarterly wages growth over the forecast period. The forecasts suggested the economy would be close to full employment over much of the forecast period on the assumption that the cash rate followed the market path. However, members noted that, as the economy approaches balance, it was becoming more challenging to determine if there was spare capacity in the labour market.

Members noted that underlying inflation had continued to ease as expected in the May Statement on Monetary Policy. In year-ended terms, trimmed mean inflation had declined from 2.9 per cent in the March quarter to 2.7 per cent in the June quarter. In quarterly terms, trimmed mean inflation had eased from 0.7 per cent to 0.6 per cent. Headline inflation had been 2.1 per cent over the year to the June quarter, also as expected in May. The easing in inflation over the preceding year had been broadly based across expenditure categories, though lower fuel prices and the effect of temporary electricity rebates had pushed headline inflation well below underlying inflation.

The outlook for inflation was little changed from the May forecast. Underlying inflation was expected to be around 2½ per cent over the forecast period, on the assumption that there was some further gradual easing in the cash rate consistent with the market path. Headline inflation was expected to increase temporarily over the second half of 2025 to around 3 per cent, before returning close to the midpoint of the target range over the latter part of the forecast period. This volatility reflected the legislated unwinding of electricity rebates, which would boost headline inflation over 2025 and 2026.

Members noted that there were risks to the forecasts for domestic activity and inflation in both directions. They agreed that the most material risks related to uncertainty around the assessment of spare capacity, the strength of the recovery in domestic demand, and the extent to which global trade and other policy developments would affect output growth and inflation.

Considerations for monetary policy

Turning to considerations for the monetary policy decision, members noted that data received since the previous meeting had been broadly as expected. Inflation was forecast to return sustainably to the midpoint of the 2–3 per cent target range over the forecast period, and conditions in the labour market were expected to be close to balance over that time. Members noted that the downward revision to the assumption for medium-term productivity growth was judged not to have implications for the degree of inflationary pressure, and hence for the stance of monetary policy.

Members noted that output growth in Australia was still subdued but was showing signs of picking up. Uncertainty about the outlook for the global economy remained significant but had declined somewhat over prior months as the prospect of retaliation against US tariffs had abated. Members agreed that financial conditions had eased since the start of the year as the cash rate had been reduced and risk premia in financial markets had fallen, but that the current stance of monetary policy was still somewhat restrictive. Members noted that the response of the economy at this stage to the easing in financial conditions was broadly consistent with historical experience.

Members agreed that the information received since the previous meeting had provided the further support that they had been seeking for the judgement that inflation was heading sustainably towards the midpoint of the target range. Members observed that the staff forecasts were consistent with the Board achieving its inflation and full employment objectives over the medium term, conditional on reducing the cash rate at this meeting and somewhat further thereafter. However, there were plausible risks to these forecasts in both directions. Members unanimously agreed that these considerations formed a strong case for lowering the cash rate target by 25 basis points at this meeting.

Members agreed that monetary policy would be well positioned following this decision to respond to future data and shocks that may emerge. Against that backdrop, they discussed their views on the economic outlook and the policy strategy required to ensure that the economy was in balance over the medium term.

Members agreed that – based on what they knew at the time of the meeting – preserving full employment while bringing inflation sustainably back to the midpoint of the target range appeared likely to require some further reduction in the cash rate over the coming year. They also agreed that it was important for the pace of decline in the cash rate to be determined by the incoming data on a meeting-by-meeting basis.

In assessing the likely pace of reduction in the cash rate over the period ahead, members noted several considerations that may warrant a gradual pace being adopted. The first was that various indicators suggested that labour market conditions remained a little tight, and the forecast for inflation was for it to be marginally above the midpoint of the target range in the medium term. In addition, private demand was showing signs of recovering, with risks on both sides of the forecast. And uncertainty about the degree of spare capacity and the neutral interest rate could warrant a measured approach to assess what incoming information reveals about these and other uncertainties.

On the other hand, other considerations might warrant a slightly faster reduction in the cash rate over the coming year. Members noted that such an approach would be appropriate if the labour market turned out already to be in balance. In such circumstances, maintaining a slightly restrictive stance of monetary policy could result in inflation undershooting the midpoint of the target range as excess capacity emerged in the labour market. A slightly faster reduction would also be appropriate if the overall balance of risks to the forecasts became more clearly skewed to the downside, perhaps because of adverse developments in the global economy or the anticipated handover from non-market sector to market sector employment growth not proceeding smoothly.

Members agreed that it was not yet possible to judge between these alternative scenarios for the pace of future reduction in the cash rate, given the prevailing uncertainties. In light of this, they emphasised the need to be attentive to the data and to be guided by how they shape the evolving assessment of risks. The Board will remain focused on its mandate to deliver both price stability and full employment and will do what it considers necessary to achieve that outcome.

The decision

The Board decided unanimously to lower the cash rate target by 25 basis points to 3.6 per cent.

Assessing the RBA’s government bond holdings

Members returned to their April 2025 discussion on whether the RBA should increase the pace at which its holdings of government bonds were running down. At that time, the Board had determined that there were no clear monetary policy or financial stability reasons to vary the approach chosen by the Reserve Bank Board in December 2023, which was to hold to maturity the bonds that had been purchased during the COVID-19 pandemic. International market developments since then had strengthened that policy conclusion. Indeed, some other central banks had responded to recent market developments by slowing their pace of unwinding bond holdings.

The scale and maturity structure of the bond holdings did, however, have implications for the RBA’s portfolio risks and returns, and so members had sought the views of the Governance Board as to whether the pace of rundown should be guided by these considerations. The advice received from the Governance Board had been that, while increasing the pace of rundown through bond sales would result in a faster reduction in interest rate risk on the RBA’s balance sheet, the risk reduction would be moderate compared with the RBA’s overall financial risk and would be outweighed by an expected financial cost (given the level of prevailing bond prices) and a potential increase in non-financial risks. Given the absence of persuasive arguments from either a policy or a risk-reduction perspective, the Board determined that bond holdings should continue to run down as they mature and that this matter no longer warranted active consideration.

Financial stability advice to the CFR and APRA

Members discussed and approved financial stability advice that the staff had prepared for the RBA to provide to the Council of Financial Regulators (CFR) and the Australian Prudential Regulation Authority (APRA) at the next CFR meeting. This was in keeping with the commitments the RBA had made in the recently updated CFR Charter and Memorandum of Understanding between the RBA and APRA (and is consistent with recommendations in the RBA Review).

In the context of declining interest rates, members supported APRA’s recent position to keep macroprudential policy settings unchanged, given any loosening had the potential to amplify macro-financial vulnerabilities. Members also supported efforts by APRA, as the macroprudential policy authority, to work with industry to ensure that a range of macroprudential tools could be deployed in a timely manner if needed.