When to expect the next rate cut

The countdown to the next RBA rates decision is on, but don’t get too excited yet. Diana Mousina, Deputy Chief Economist for AMP, anticipates a pause – but still believes there are cuts to come.

“The economy is running below its potential. I think the inflation data will mostly be in line with the Reserve Bank’s forecast and will be below the 3% target. We need lower interest rates because the level of rates is still too restrictive on the economy,” Mousina says.

Just don’t expect cost of living pressures to disappear as part of the ongoing easing cycle.

“Wages haven’t kept up with inflation. That is still going to continue because we have seen a big level of adjustment in prices and it takes time for wages to catch back up to the lost income people had,” she explains.

In this interview, Mousina shares the key signals she’s watching in the economy, why everyone is talking about productivity, and which RBA meeting might offer an awaited rate cut.

The turning point in the Australian economy

If you consider the Australian economy over the last year, exciting is not the world that comes to mind. Mousina describes growth as lacklustre.

The Australian economy grew by 1.3% in the financial year ending June 2025. To use the Australian Bureau of Statistics wording, this “marked the weakest year on year growth since the early 1990s, excluding the COVID-19 impacted 2019-2020 year.”

Mousina believes we are at a turning point.

“The public sector has been a major driver of growth in the past two years. We’ve seen that in the labour market. We’ve seen that in investment. The public sector is slowing as a share of growth in the economy. The private sector is picking up, but there is more work to be done,” she explains.

She argues a lower interest rate and tax rate environment should support consumer and business investment, along with housing construction.

“We think GDP growth is going to be just under 2% for the next 12 months or so. It will still run a bit below its potential, but better than we were a year ago.”

The key signal to watch

Inflation has dominated conversation over the past few years. The RBA has a dual mandate to consider full employment and price stability (aka inflation).

Inflation finally appears to be under control. 

Though the latest release surprised on the upside at 3% for August 2025, it is in keeping with the RBA's target band of 2-3%. Prior to that, the data was down the bottom of the range.

Mousina comments that the environment for households is going to be better, though it may feel slow for cost-of-living pressures to turn around while we await wages catching up.

We’re not completely safe yet though when it comes to inflation.

“There are still upside risks to inflation. For example, dwelling construction costs, goods prices and the impact of tariffs on those,” Mousina notes, but highlights the RBA is more likely to be monitoring the labour market now.

“There are concerns that interest rate rises could weaken the labour market. The good news is that unemployment hasn’t increased too much, it bottomed at 3.5% and is currently 4.2%,” she says.

Interestingly, the labour market is also something Mousina is monitoring in the US market, alongside the positive earnings season. On the whole, she feels the US market has held up nicely, with an easing cycle supporting the consumer and other drivers.

What you need to know about productivity

Productivity has been a concern of late and not just in Australia. US has been one of the few countries to buck the trend of weaker productivity growth. There hasn’t been significant growth in productivity in Australia since 2016. In the last measure (2023-2024), the 20-year average annual growth rate in productivity was 0.8%.

“We care about productivity growth because it is the long-term driver of wages growth and living standards. Household disposable income rises with productivity growth,” Mousina explains.

It is measured using a number of indicators, with the broadest one being GDP per hour worked and it can be broken down into sectors.

“The non-market sector has had weak productivity growth in recent years, but always will compared to the private sector because you don’t target productivity and improvements in productivity in the care economy. Agriculture has been an outperformer with really strong growth, while mining has had weaker growth,” Mousina highlights.

The recent productivity summit came out with a number of recommendations to support better productivity – but Mousina cautions not to expect a quick change-around.

“Some are easier, quick wins like activity in the construction sector that can offer an improvement in productivity in the next 12-18 months. Other things, like education standards, take years to move through the system,” she says.

The timing of the next rate rise

Mousina expects a pause in the meeting on 30 September 2025, as the central bank continues to monitor the results of the last cut. She anticipates a cut in the November meeting, as the current level is restrictive for the economy.

“We think there will be one more rate cut in November and then one more in the first half of next year, taking the cash rate to 3.1%,” Mousina says.

She notes that the RBA’s own estimates average close to 2.9% - the current rate is 3.6%, leaving room to move.

Investing in the current environment

On the whole, Mousina is positive about the outlook and the potential for further cuts to offer support to the economy.

“It doesn’t look like we’re going to have a major decline in share market performance. Earnings growth is still holding up and there’s still opportunities from exposure to growth assets, like US equities, even if you think there might be a bubble in the tech sector,” she says.

She reminds investors that either way, “most years in share markets tend to be positive. There will still be negative years, but being invested over time is going to help balance out those years.”