Potential 'market meltdown' a reason for as many as four RBA interest rate cuts

Australia Broadcast Center

06-07-2025

The potential for lower interest rates has put a spring in Nia Pandoulis's step.
She runs Soult Australia, based in Sydney, selling clothing and accessories for the warmer months of the year.
"We create things that you would take to Europe, you would take to the beach, you would take to that holiday," she said.
Ms Pandoulis juggled a full-time job with her fashion side hustle and hoped lower interest rates would help transform it into a larger business.
"I think our consumers would have a lot more confidence in what they're buying and what they're looking to buy.
"And we, as a business, would benefit without those additional costs.
"If we want to grow and get ourselves out there in that market, we would really benefit from [lower interest rates]."
Ms Pandoulis is among millions of Australians hoping for interest rate relief this week.
The Reserve Bank is widely tipped to drop interest rates by a quarter of a percentage point to 3.6 per cent on Tuesday, and all big four banks are now forecasting a quarter of a percentage point cut to the cash rate.
According to interest rate comparison website Mozo, this means owner-occupier borrowers with a $500,000 mortgage could save $76 a month, or $918 over a year, on their home loan repayments.
This is based on the average variable home loan rate of 6.15 per cent per annum in the Mozo database for owner-occupiers, paying principal and interest with an 80 per cent loan-to-value ratio.
Economists say lower inflation and gathering global economic storm clouds are supporting the case for a Tuesday interest rate cut.
"It looks like a no-brainer that the Reserve Bank's going to cut the cash rate again at its July board meeting," AMP deputy chief economist Diana Mousina said.
"The cash rate is currently at 3.85 per cent. There's more than a 90 per cent chance priced into financial markets … that we will see that cut to 3.6 per cent."
Ms Mousina said AMP expected several interest rate cuts to follow later this year.
In the statement accompanying the RBA's May interest rates decision, the RBA's Monetary Policy Board noted "a severe downside scenario".
"[It] 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 statement said.
Ms Mousina said a major financial market correction was possible, which would further support the central bank's case for looser monetary policy.
"And given that the starting point is already share markets at a record high around the world, increased risk of volatility, investor uneasiness and uncertainty about future economic and trade policy, particularly from the US, you'd have to say there's a very big risk that markets may fall by 10 per cent or 15 per cent."
AMP forecasts as many as four RBA interest rate cuts by early next year.
"And then one in early 2026.
"That means that we're expecting the cash rate to reach a bottom of 2.85 per cent, and that's close to our estimate of where we think the neutral level of interest rates is.
"That's the sweet spot that the Reserve Bank wants to reach."
The "neutral level" of interest rates is where the Reserve Bank perceives total demand in the economy equals supply, and there is no upward or downward pressure on price growth for goods and services.
Other economists are not so confident the Reserve Bank will drop interest rates.
Independent economist Sherman Chan thought the Reserve Bank might wait until August.
"The Reserve Bank has made it pretty clear that the quarterly CPI series is their preferred measure [of inflation], so there is a chance they may wait until the June quarter CPI data before they decide," she said.
"That would be in August."
Whether or not the Reserve Bank lowers interest rates on Tuesday, it is likely the central bank will lower interest rates further in the months to come.
That is potentially disappointing for Australians looking to get a foot on the property ladder.
"Since rates started to decline, we've seen cities like Sydney, Melbourne, Brisbane and Perth up more than 2 per cent," said Cotality's head of research Eliza Owen.
"[Also] Adelaide almost up 2 per cent, but the biggest benefactor has been Darwin — up 6 per cent."
Property prices, she said, could go higher as interest rates fall.
"It's pretty likely that if you see a reduction in interest rates, you're going to see an increase in housing values," Ms Owen said.
"A reduction in interest rates is kind of like a price cut on the cost of debt.
It is a bitter pill for Nia Pandoulis, who is hoping to be able to buy a property at some point in the future.
"I do want a home one day," she said.
"Especially for our generation, we've already got our HECS debts, we're already indebted from our 20s, and then we're working full-time jobs, and maybe we're starting up businesses.
"So the prospect of a home is really not on the cards right now.
"As someone in Sydney, I think the reality is that it would get pushed further and further out, and I would like to stay where I grew up."
The Reserve Bank will announce its decision on interest rates Tuesday at 2:30pm AEST.