Shock inflation read ‘final green light’ for July rate cut call: CommBank

Australia’s largest bank has backflipped on its forecast for next fortnight’s Reserve Bank meeting, now tipping the board to cut the cash rate by 25 basis points.

That would mark the central bank’s third 2025 cut, following downwards movements in February and May.

It would see the cash rate at 3.60% – down from its current 3.85% and the lowest it’s been since May 2023.

“A combination of a dovish May RBA decision and the flow of data since sees us shift our base case to a rate cut in July,” CommBank senior economist Belinda Allen said.

Shock inflation read changes the game

A shock drop in inflation was the “final green light” for a July cut, Ms Allen said.

The consumer price index (CPI) rose just 2.1% over the 12 months to May, according to Australian Bureau of Statistics (ABS) data released Wednesday morning.

That’s notably lower than market’s prior predictions, with the consensus forecast having been 2.3%.

Meanwhile, trimmed mean inflation – the Reserve Bank’s preferred gauge that filters out highly volatile price movements – also eased.

“Annual trimmed mean inflation was 2.4% in May 2025, down from 2.8%in April,” ABS head of prices statistics Michelle Marquardt said.

“This is the lowest annual trimmed mean inflation rate since November 2021.”

The RBA targets an annual inflation rate between 2% and 3%, with a preference for the midpoint of 2.5%.

CommBank: More cuts on the horizon

Ms Allen said the bank had previously expected cuts in August and September, with July considered a ‘live’ meeting depending on incoming data.

“Today’s monthly CPI print capped off a flow of data that should provide comfort to the RBA that a swifter return of the cash rate to neutral is both manageable and needed,” she said.

The RBA monetary policy board next meets on 7 July, with its decision to be announced on Tuesday, 8 July.

CommBank is also retaining its forecast for an August cut, which would take the cash rate down to 3.35% – a level the bank sees as ‘neutral’, neither contributing to or weighing on inflation.

But, while the big bank now predicts a July cut to be the most likely outcome, Ms Allen remains wary of a hold, noting the RBA’s decision will likely be “a close one”.

“The case to leave the cash rate on hold would be around diminished trade uncertainty since the heightened May environment, a still tight labour market, and wanting to see a full quarterly CPI print,” she said.

While monthly CPI data can be useful, the ABS’s quarterly inflation figures take into account more comprehensive data and are generally considered more reliable.

More cuts in late 2025 or 2026?

Looking further ahead, CommBank sees the possibility of a fourth rate cut either later in 2025 or in early 2026.

Meanwhile, Westpac recently revised its forecasts, now expecting two rate cuts in 2026.

Westpac chief economist Luci Ellis still expects the RBA to hold in July, before cutting in August, November, February, and May – ultimately bringing the cash rate to 2.85%.

What would a July rate cut mean for home loan borrowers?

If the Reserve Bank cuts the cash rate to 3.60% next month and lenders pass on the full reduction, mortgage holders could see meaningful relief.

Assuming lenders adjust their pricing accordingly, the average variable rate on a new owner-occupier home loan could fall to around 5.50% p.a.-down from roughly 6.00% p.a. in April, prior to the RBA’s May rate cut.

For a borrower with a $500,000 mortgage, a drop from 5.75% p.a. (reflecting the May cut) to 5.50% p.a. could reduce monthly repayments from about $2,920 to $2,840.

That represents a saving of approximately $120 per month, or more than $1,400 annually.

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_{Image courtesy of the Commonwealth Bank of Australia}