RBA Cuts Cash Rate to 3.6%

In a bid to stimulate economic activity amid easing inflation and rising unemployment, the Reserve Bank of Australia (RBA) lowered its benchmark cash rate by 25 basis points (bps) to 3.60% on 12 August 2025, marking the third cut this year following previous reductions in February and May.

Economic Context & Key Indicators

• Inflation has steadily declined: headline rate is now around 2.1%, with underlying metrics like the trimmed mean easing into the 2–3% target range.
• Unemployment has nudged higher to approximately 4.3%, signalling softening labour market conditions.
• Wage growth remains steady at 3.4% in Q2 2025, driven largely by public sector increases, which slightly outpace private sector growth.
• The RBA also downgraded its forecast for long-term productivity growth, from 1% to 0.7%, trimming the nation’s potential growth rate to 2% and shaving AU$30 billion off projected economic output over two years.

What This Means for Small Businesses:

Cheaper Financing & Lower Debt Burden

For small entities reliant on borrowing for operations, investment, or cash flow management, the rate cut provides immediate relief:

Borrowers with a $700,000 mortgage stand to save around AU$1,104 annually, with major banks pledging to pass on the full cut.

For $500,000 mortgages, estimated savings climb to AU$272 per month—that’s over AU$3,200 per year.
These reliefs can ease liquidity strains, potentially freeing up capital for business needs, expansion, or hiring.

Stimulating Consumer Demand

Lower rates often translate into reduced borrowing costs for consumers, boosting discretionary spending. That can uplift small retailers, cafés, and service providers. However:

Eased rates can also fuel property demand—with Sydney home values already up 6.5% this year—which may squeeze small businesses via higher rental or real estate costs.

Challenges Despite Tailwinds

• The productivity downturn poses a long-term challenge to business profitability. With weaker productivity growth, small businesses may face stagnating margins, especially if cost pressures persist.
• Wage dynamics are also a double-edged sword: while public sector-led wage growth supports consumer spending, it can raise competition for talent and wage expectations.
• Lastly, despite the RBA’s gesture, further cuts remain conditional and measured. Future decisions hinge on upcoming inflation and employment data.

The RBA’s rate cut to 3.6% offers welcome short-term relief—particularly in borrowing costs—for small businesses, especially those dependent on credit lines or managing mortgages. If passed through effectively by lenders, reduced repayments could inject vital liquidity, aiding investment or operational sustainability.

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