Interest Rate Updates and Outlook for the Australian Dollar

Key points:

• Australian borrowing costs are influenced by US interest rate trends, which remain a key influence on Australian longer-term rates. The US Fed is likely to narrowly support two more US interest rate cuts before year-end.
• The RBA held rates steady in September, citing stronger consumer spending and a higher-than-expected August inflation reading. A further cut before Christmas now looks unlikely.
• The AUD/USD has risen to US$0.66-0.67, supported by a weaker USD and stronger commodity prices. A modest further rise is possible.

 

US Interest Rate Update

In September, the US Federal Reserve cut rates by 25bps. While nearly unanimous, views diverge on what’s next: a slim majority expects two more cuts this year, while a substantial minority prefer to hold steady.

The split reflects differing views on inflation and employment. Some worry tariffs could lift inflation more permanently, while others have greater focus on slowing job growth and see tariff effects on inflation as temporary.

The most likely outcome is the narrow majority votes for two further US interest rate cuts this year, which will be supportive for US growth.

 

Australian Interest Rate Update

As expected, the RBA left the official cash rate unchanged at 3.6% at its September 2025 Board Meeting. Back in August, the RBA had assumed two further rate cuts would be necessary to sustain low unemployment and deliver a modest strengthening in economic growth. The Board discussed the strategy for delivering these cuts in August. Developments since August suggest the Board will deliver these cuts only slowly and that a further interest rate reduction in the near term is unlikely.

What’s changed? Consumer spending appears to have strengthened in recent months, and unemployment remains very low at 4.2%. Most importantly, inflation trends were stronger than expected, based on the August monthly CPI. Furthermore, SEEK job ads, one of two extremely reliable indicators of the trend for the Australian economy and interest rates, have risen slightly in the past two months. Together, the trends in the data suggest that barring a rise in the unemployment rate to 4.4% or above in the very near term, a further cut in interest rates before Christmas is now unlikely.

 

AUD/USD Outlook

The Australian dollar (AUD) is influenced by several key factors. Most models of the AUD use a combination of Australia/US interest rate differentials, selected Australian commodity prices and some measure of risk. While these models simplify a complex picture, they help explain broad movements in the exchange rate.

Consideration of the trends in each of these key drivers is important, however as the chart shows, mostly the AUD/USD has exhibited a reliable inverse relationship against the USD. So, when assessing the outlook for the AUD, it’s also important to consider the outlook for the USD - which is even more complex than the AUD outlook.

For most of the past decade, the AUD has been below its post-float average of around US$0.75. Interestingly, the AUD did not rise as much as expected earlier this year when the USD weakened as President Trump introduced major tariffs and US policy generally became less predictable.

The AUD did benefit somewhat, however several factors held it back: the RBA cut rates before the US Fed did, bulk commodity prices fell (outweighing more favourable movements in precious metals and base metals), and tensions between the US and China (Australia’s largest trading partner) added pressure.

Looking ahead, commodity prices are finding a firmer footing, and the US Fed is expected to reduce interest rates by more than the RBA in the next few months, which likely will support the AUD. While managing currency risk is always important, the outlook suggests that the AUD may strengthen a little further against the USD by the end of 2025.

 

What it means for my business

• Modest US and Australian rate cuts are anticipated - in the US before the end of the year, in Australia now probably not until next year. Sharper falls are unlikely as the economy is not extremely weak.
• The AUD may rise slightly further against the USD into year end. Businesses should consider how currency shifts could impact pricing, costs, and competitiveness.

 

Author: Ivan Colhoun  Consulting Economist for Bank of Sydney Bachelor of Economics (Hons) Ivan is a highly experienced chief economist and keynote speaker on the Australian economy and financial markets. His career has included leadership roles within financial and professional service organisations, as well as the Reserve Bank of Australia.