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RBA Holds at 3.85%: Currency Ripples & Real Estate on the Rise

2025-02-03
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RBA Holds at 3.85%: Currency Ripples & Real Estate on the Rise

Introduction
In July 2025, the Reserve Bank of Australia (RBA) opted to keep its cash rate unchanged at 3.85%, defying investor hopes for a cut amid growing economic uncertainties. This decision, while not surprising to economists, has generated ripples across financial markets, notably impacting the Australian dollar (AUD) and accelerating growth in the property sector. The steady rate reflects caution—balancing inflation control against emerging global volatility.

The Rate Decision: A Delicate Balancing Act

The RBA’s decision was not unanimous. In a 6–3 vote, board members leaned toward maintaining the current rate, citing mixed economic indicators:

Inflation remains above the 3% target, driven largely by service prices and wage pressures.
Unemployment has ticked slightly upward to 4.2%, though labor participation is at a record high.
GDP growth in Q2 fell short of expectations, rising only 0.3%, sparking fears of a “per-capita recession.”

Governor Michele Bullock emphasized that the pause allows for “additional data observation” and that the board stands ready to “act if inflation expectations rise materially.”

Market Response: Currency Strength & Bond Volatility

The Australian dollar rose sharply following the RBA’s decision—reaching a 10-week high against the USD, trading at 0.692.
Investors interpreted the hold as an indication of policy conservatism amid a more hawkish global backdrop, especially from the U.S. Federal Reserve and European Central Bank.

Bond yields, particularly the 2-year and 10-year Australian Government Securities (AGS), showed mild inversion. Fixed-income traders began adjusting expectations for a possible rate cut in Q4, potentially in November.

Currency analysts noted:

AUD strength is partially attributed to China-Australia trade stabilization, particularly in iron ore.
Global risk-off sentiment, especially surrounding U.S. tariffs under a second Trump administration, has driven capital back to “stable middle-ground economies” like Australia.

Real Estate: Back to a Mini Boom

While rate hikes from 2022 to 2024 cooled housing markets, this prolonged plateau in rates is now reigniting demand:

CoreLogic’s June data shows national property values up 0.6% MoM, and 1.4% QoQ.
Capital cities like Brisbane (+2.2%) and Perth (+2.9%) are leading gains, driven by population growth, land scarcity, and new-home bottlenecks.
Regional areas, once stagnant, are rebounding thanks to remote work normalisation and infrastructure investment.

Mortgage lenders, buoyed by competition, are once again offering fixed rates below 5%, intensifying demand from first-home buyers and upgraders.

Who Wins, Who Loses?

✅ Winners

Homeowners: Those who locked in lower rates earlier are enjoying rising equity.
Real estate developers: A pause in rates encourages project launches, particularly in high-growth corridors.
Exporters: AUD strength against Asian currencies supports capital imports and materials purchasing.

❌ Losers

Retirees and savers: The real return on cash savings continues to underperform inflation.
First-time buyers: As prices climb and supply remains tight, affordability metrics worsen.
Small businesses: Many expected rate cuts to ease operational loan costs—this pause delays relief.

Interest Rate Forward Guidance: What’s Next?

Economists from Westpac and NAB are split:

Westpac expects a cut in November 2025, citing weakness in discretionary spending and business confidence surveys.
NAB, however, believes the RBA may hold steady until Q1 2026, unless there’s a global growth shock.

Global pressures complicate forecasts:

U.S. Fed remains hawkish, with inflation sticky at 3.2%.
China’s rebound is weaker than expected, reducing export optimism.
Commodity prices, especially for coal and iron ore, are volatile but above mid-2024 levels.

Should the RBA pivot to a rate cut too soon, it may risk undoing hard-earned inflation control gains. Too late, and consumer confidence could erode further.

Impacts on Investment Strategy

As rates plateau, smart capital is rebalancing portfolios:

Property: Investors are returning to residential REITs and off-plan investments, especially in NSW and QLD.
Equities: ASX-listed banks and building materials companies are gaining interest.
Bonds: Short-duration bonds remain preferred due to curve inversions.
FX: Traders favor AUD long positions vs JPY and EUR, though wary of U.S. rate adjustments.

Asset managers are warning of “selective euphoria,” where certain sectors may overheat without broad economic support.

What Should Retail Investors Do Now?

Stay diversified: Don't chase one sector. Diversify across geographies and asset classes.
Watch fixed income: Short-term fixed deposits or 1-year government bonds offer low risk with moderate returns.
Monitor property cycles: Investors should look at undervalued suburbs, not just price growth leaders.
Be patient on equities: Earnings season in Q3 will be pivotal—especially for housing and retail stocks.
Keep an eye on the RBA language: Forward guidance in the August statement may hint at cuts.

Global Context: How Australia Compares

Compared to other advanced economies:

Australia’s inflation (3.5%) is slightly lower than the U.K. (4.1%) and Canada (3.9%).
Its central bank is among the most conservative, with only 4 cuts in 24 months.
AUD remains one of the top 5 traded currencies in Asia-Pacific, benefiting from commodity-export status.

However, with global geopolitical uncertainties—including U.S.-China tensions and EU stagflation—Australia’s policy must remain adaptable.

Conclusion

The RBA’s July 2025 decision to hold rates steady at 3.85% reflects more than just inflation targeting—it’s a strategic pause amid a fast-changing world. For investors and households alike, this presents both opportunities and risks. Whether it's navigating a reinvigorated real estate market or managing currency exposure, the next few months will be critical in shaping portfolio performance.

The one certainty? Vigilance. The Australian economy is stable but walking a tightrope—and every investor should keep both eyes open.