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.