The Australian dollar weakened 1.1% to $0.6411 on Wednesday as softer-than-expected GDP data fueled bets that the Reserve Bank will cut interest rates earlier in 2025. The 0.8% year-on-year growth in the third quarter missed expectations of 1.1% and was down from 1% in the previous quarter. Private spending weakened due to high mortgage rates and sticky inflation, while soft commodity prices also weighed due to weak demand from overseas, particularly in China.
The data sparked speculation that the RBA will be forced to ease policy sooner rather than later, as the GDP miss had sent the interest rate market pulling forward a first 25bp RBA rate cut into April from May. Recent signals from RBA members that the central bank would keep interest rates high for longer due to sticky underlying inflation were also undermined.
The RBA’s forecasts show underlying inflation remaining above its 2-3% target range until 2026, but softening economic conditions in the country may prompt early rate cuts. ANZ and Westpac expect the RBA to begin cutting rates by May 2025, while Capital Economics predicts a short easing cycle in the second quarter of next year.