Statement on Monetary Policy – August 2025Overview

In Australia, inflationary pressures have eased as expected and both headline and underlying inflation are within the 2–3 per cent range. Labour market conditions have also eased a little, while private demand growth is recovering and public demand is continuing to support growth in economic activity. Risks to the outlook for global economic growth are skewed to the downside but the risk of a very damaging trade war has receded.

Supported by the assumed gradual removal of policy restrictiveness, the economy is judged to stay close to full employment over the forecast period and underlying inflation is projected to remain around the midpoint of the 2–3 per cent range. With momentum in the domestic economy gradually lifting, the risks to the outlook and inflation are judged to be broadly balanced.

The Monetary Policy Board judged that a further easing in monetary policy was appropriate, given that inflation has continued to moderate. However, the outlook remains uncertain, and the Board will be attentive to the data and the evolving assessment of risks.

Inflation remains in the 2–3 per cent range.

Underlying inflation has continued to ease towards the midpoint of the 2–3 per cent range. Monetary policy has worked to bring inflation down; the disinflation has been broadly based across expenditure categories in the CPI.

Headline inflation has declined in year-ended terms, as expected. Headline inflation has been below underlying inflation recently, largely reflecting lower fuel prices and the effect of temporary electricity rebates.

Labour market conditions have moved closer to full employment.

Labour market conditions have eased slightly but capacity constraints remain, though there is uncertainty around this assessment. The unemployment rate increased in the June quarter to 4.2 per cent as expected, while the participation rate and employment-to-population ratio remain around their levels in late 2024. Leading indicators, such as job advertisements and vacancies, have been little changed in recent months. Year-ended wages growth has eased from its highs, but unit labour costs growth remained elevated in the March quarter partly reflecting persistent weakness in productivity growth.

Private demand growth is recovering. Overall GDP growth was a little softer than expected in the March quarter due to a decline in public demand, but the pick-up in private domestic demand was stronger than forecast. Partial data for the June quarter suggest that household consumption is tracking in line with the May forecast.

Global growth has been steady but is expected to slow.

Global GDP growth appears to have been little affected by trade developments over the first half of the year, but policy uncertainty remains elevated. While recent announcements have seen US tariffs higher than expected in May, retaliation from other jurisdictions has been less than feared and global trade flows are adjusting. The pattern of Chinese exports has adjusted rapidly to higher US tariffs, with the decline in exports to the United States more than offset by higher exports to other countries. Recent international trade policy developments have had little discernible impact on the Australian economy to date. The risks of a very damaging trade war appear to have diminished somewhat, but risks to global growth remain skewed to the downside and a more material disruption to global trade cannot be ruled out.

Growth in Australia’s major trading partners is nevertheless expected to slow from here. Higher tariffs and broader policy uncertainty are expected to affect global growth and inflation over the second half of 2025 and into 2026. This is particularly the case in the United States where there are signs the labour market is weakening. By contrast, Chinese GDP growth is expected to remain relatively resilient, in large part because of broad-based policy support by the authorities. The effect on the Australian economy is expected to be modest but is subject to a high degree of uncertainty.

The domestic economy is expected to come into balance.

Cash rate cuts have been passed on to households and businesses. Reductions in the cash rate in February and May have been passed through to deposit and lending rates, and financial conditions in Australia have eased. Market participants expect some further easing in the cash rate over the year ahead. While monetary policy has restricted the growth of domestic activity in recent years, the forecasts are consistent with monetary policy becoming less restrictive. The cash rate path assumed in the forecasts settles at around 3 per cent and the forecasts suggest that this path is consistent with sustaining balance in the economy, although this assessment is uncertain.

Domestic GDP growth is expected to pick up, but at a somewhat slower pace than forecast in May. Over 2025, the recovery in GDP growth is expected to occur more gradually than previously forecast because weaker-than-expected growth in public demand in early 2025 is not expected to be offset through the rest of the year. Private demand growth is forecast to be a bit stronger than it was over the past year, and to be the main driver of growth over the forecast period. GDP growth is expected to settle at a lower rate than previously forecast over the medium term, due to the lower outlook for productivity growth.

Labour market conditions are expected to ease a little to be close to full employment over the forecast period. The unemployment rate is forecast to be little changed, but employment growth is expected to ease from strong rates to be largely in line with population growth, while wages growth is expected to ease gradually before stabilising over 2026 and 2027.

Underlying inflation is projected to remain sustainably around the midpoint of the 2–3 per cent range. The outlook for underlying inflation remains similar to expectations in the May Statement. Headline inflation is expected to increase over the second half of 2025, mostly due to the scheduled unwinding of electricity rebates, before returning to around the midpoint of the target later in the forecast period. There are risks on both sides of the outlook for domestic inflation and activity.

The Monetary Policy Board decided to lower the cash rate target by 25 basis points to 3.60 per cent.

The Board judged that a further easing in monetary policy was appropriate, given that underlying inflation has continued to decline back towards the midpoint of the 2–3 per cent range and labour market conditions have eased slightly, as expected. The Board remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and potential supply, and that uncertainty in the world economy remains elevated. The Board noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia. The Board will be attentive to the data and the evolving assessment of risks and is focused on its mandate to deliver price stability and full employment.