Australia has emerged as a haven of calm compared with global markets, but the Reserve Bank of Australia’s (RBA) latest policy move suggests its easing cycle may already have reached its limit.
According to VanEck’s October ViewPoint report, the RBA has delivered only a “salami cut” to interest rates, responding to backward-looking indicators that briefly allowed some flexibility.
However, the central bank now faces renewed uncertainty as a modest rebound in private sector growth threatens to push inflation below the bottom end of its target band.
VanEck has cautioned that there are few domestic reasons to expect a continued run of rate reductions and at least three reasons to anticipate any further cuts will be “grudging”.
First, Australia’s long-running “panic over low productivity” remains unresolved. The report noted that the problem largely stems from a falling capital-to-labour ratio – a trend that could only be reversed through a mix of higher wages, lower interest rates and stronger growth.
Instead, VanEck suggested policymakers appear more comfortable “holding talkfests and mumbling about red tape” than implementing structural change.
Second, the central bank’s persistent reliance on natural rate modelling has left it misaligned with current conditions.
The modelling implied that the labour market remains too tight and inflation should be rising – an assumption VanEck contrasts with reality.
It argued that while inflation has returned well within the RBA’s target band, the neutral interest rate remains well below the current cash rate.
Finally, the report highlighted that housing market pressures are likely to stay front of mind for policymakers.
“As soon as a rate cut arrived, the housing market commenced ticking up,” VanEck said, adding that despite assurances to the contrary, the RBA “will be watching housing nervously”.
The most recent inflation print has already prompted markets to push out expectations for the next rate cut – from late 2025 into 2026. Many participants, VanEck noted, now believe the RBA may have delivered its final cut this cycle.
Political dynamics could further complicate the outlook as the report pointed to rumours that Labor intends to complete federal pre-selections before year-end, potentially allowing scope to propose tax changes and “sprint to an early election” while the opposition remains divided.
While domestic conditions appear stable, VanEck warned that Australia will not be insulated from international developments. A global slowdown would quickly feed through to local growth and equity markets, particularly given Australia’s exposure to low price-to-earnings sectors.
“As a fellow debtor, Australia can expect to pay more for funding,” the report said, noting the dependence of the major banks on offshore debt markets.
Should the US dollar fall sharply, the Australian dollar could strengthen in response, eroding export competitiveness and reducing the value of foreign investments for domestic investors.
“Rather than being entirely cynical, there does remain a small chance something could emerge from the recent talkfest,” VanEck said.
