Economy & Property - July 2025

July 2025: Rate Decision, Property & Economy 

Welcome to the new financial year. The RBA announced its fourth decision for 2025, holding the official cash rate at 3.85%. 

Money markets were expecting a third interest rate cut in this cycle, following weak data in retail sales, inflation control and soft consumer confidence. This result was a big surprise and raises questions about the timing of cuts in this cycle.

Growth is very sluggish, and to an extent, propped up by our above-average population growth (amongst developed economies, only Canada is higher). The now common measure of growth of "Real GDP per Capita" actually fell 0.5% last year, which puts us near the bottom of the world ladder.  

Broadly, some positive momentum remains somewhat stifled by the ongoing uncertainty surrounding US trade policy, including the expiration of the tariff pause which is on the world's mind.

"Boring" News Month

The scorecard remains mixed, though relatively uneventful for the most part. The labour market is robust enough, and whilst business conditions and confidence remain soft, some consecutive periods of stability in economic conditions are a platform at least.

There may be some risk to employment if Government spending eases off as it eventually must do.  

The recovery in US equities has largely settled jitters, placating for now, the downside risks of economic hardship in the short term.

Inflation Settles

Inflation fell to its lowest marker in nearly four years. Headline at 2.1% in May from 2.4% in April was below expectations.

The "Trimmed mean" is a preferred RBA measure of underlying inflation, which fell to 2.4% in May from 2.8% the previous month. As a flashback, a reminder that inflation was above 8% in late 2022. Governments will take the credit for this price stability, though households (behaviour) and the RBA (policy) have been the key players.

RBA Positioning

The message from the Governor was fairly directional after the inflation results. “I think if we continue to observe inflation coming down and staying down sustainably, then to the extent that we think there’s still restrictiveness in monetary policy, and we think there is a bit, then that would give us opportunities to lower the interest rate further." 

So markets will be surprised and the expectation will now roll into August.

Shares & Markets

The All Ordinaries market showed black ink again after a wobble due to international events.  There is plenty for the Bulls and Bears with the expected rate cut to help markets. The end of the 90-day US tariff pauses a drag on sentiment.

As the financial year ended, the local market delivered better than 10% growth, which was a surprise to some. IT & tech led the way, while Minerals & Energy were vulnerable and fell the other way. The Financial sector (including Banks) contributed over 30% growth.   

Equity Markets Worldwide

The stability (for now) on global affairs in the Middle East was well received by markets. Negotiations on trade tariffs between the US and other countries are in full swing as we speak, so exposed markets will remain jittery.  

The Japanese market improved strongly of late, nearly recovering losses over the year. The depreciating yen was a factor that boosted the export competitiveness of Japanese products. Reporting season was also kind, with Japanese technology and allied sectors showing strong earnings, which supported investor confidence.

The US rally continues, buoyed by a robust labour market, strong earnings and expectations of rate cuts, along with softening geopolitical risks and very positive investor sentiment. 

Direction for Local Interest Rates?

A material change in the period regarding future rate trends. There are greater expectations for rate falls over the next 6 months, with the view that the RBA will need to take stronger action.

As a result, the graph shows a steady fall, then a flattening priced in for the ASX Cash Rate Futures.

As always, this will change quickly if expectations are not met along the way.

Interest Rates Worldwide

The story of central banks worldwide has shifted from a steady loosening to a more cautious approach. The focus has shifted to balancing inflation risks with concerns about trade, tariff policy and broader economic conditions.

New Zealand's central bank has delivered six consecutive rate cuts (225 points) since August 2024 by employing a "machete" monetary policy approach. They meet again tomorrow, where they are expected to pause this time. They will need to keep something in reserve for any future shocks.

The U.S. Federal Reserve didn't drop rates in June, despite pressure from all sides. They remain concerned that tariffs could reignite inflation (which is still just above target) or stifle growth. While markets expect a rate cut in the second half of 2025, the central bank is preaching patience, with no rush to adjust rates until the economic outlook becomes clearer.

In the UK, The Bank of England Governor, Andrew Bailey, said that “the path of interest rates will continue to be gradually downwards,” which was well received by many. The expectation is a 25 point cut at the next meeting in August, taking their cash rate to 4.0%.  Inflation is still a threat.

Canada paused further easing for two consecutive meetings.  While inflation is close to its 2% target, this is another economy with a wait-and-see approach. The risk of economic weakness due to trade disputes remains high, and they are materially exposed to events in the US.

Central Bank Cash Rates

Before posting any changes today, we compare central bank cash rates and their longer-term 10-year bond yields.

In what is largely good news (in my mind at least) the Spread between Cash and the 10-Year was unchanged with very little volatility at either end of the curve.

This lack of volatility means that there is relative consensus on the projected direction of interest rates. If the US and UK experience further central cash falls, then we will see a return to more normal yield curves. 

Local Money Markets

Australia’s longer-term interest rates are trending down. While nothing can be taken for granted, if yields on bonds sustain this, it will continue to cause lower returns for cash investors and lower costs for borrowers.

Residential Property Performance

The latest monthly residential property results from CoreLogic (see table below) rose by 0.6% overall in June. The 25 point rate cut in February stimulated the market to a degree. There are still restraints based on affordability in many markets, and rate drops will need to be more substantial for this to be impacted.  

Property Trends

The relatively stable conditions led to an uptick in buying and selling activity which was evident in the auction results.

There are some signs - following anecdotal evidence - of Melbourne rising from the ashes and that momentum will be interesting to follow.

There are even more signs that the challenging conditions in the broader commercial property market are improving. Lower interest rates, of course, but also the first signs of a lack of new stock coming online. We await more data in the coming months.

Business Conditions

Traditional measures, such as Roy Morgan’s Business Confidence Index show that Business Confidence is up from a year ago and from the last quarter too. The increases include a sharp lift in Victoria (off a low base) and Queensland (from a high base), with declines in both Western Australia and New South Wales.

Apart from Queensland, business confidence in other states remains below a neutral level. Looking forward and despite mixed sentiment, falling interest rates and relatively stable macroeconomic conditions may encourage greater business investment.

Business Cashflow
As we enter the second half of 2025, managing cash will become increasingly important. Understanding the cash flow fundamentals can help you get you ahead.

Currency Wrap-Up

The Australian dollar was strong against the USD, although that is off the back of a very weak period for our currency.

There is red ink mostly everywhere else, and for mine, that is a slight surprise. The same factors are at play, including weak Chinese growth and demand for key Australian exports such as iron ore and coal.

Australia’s stable financial system and open markets generally make the AUD attractive at this stage in the economic cycle, though who would dare speculate on a currency?

2025 RBA Policy Announcement Dates

We hope you enjoyed our fourth Economy & Property Insights post for 2025, thanks for reading.

Monetary Policy Announcements will be made at 2.30pm on the following Tuesdays in 2025:

•    12 August
•    30 September
•    4 November
•    9 December

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