Central Bank lowers rates to two-year low in May

Bank resumes easing cycle, as expected: At its meeting on 19–20 May, the Reserve Bank of Australia (RBA) resumed its monetary policy easing cycle, lowering the RBA cash rate target by 25 basis points to 3.85%. The move, which had been priced in by markets, was the second rate cut in the current easing cycle, and brought rates to their lowest levels in two years.

Domestic economic outlook downgrades plus global economic uncertainty drive move: The RBA’s move was motivated by a combination of a softer outlook for inflation and economic growth at home plus a rise in global economic uncertainty. The Bank highlighted that inflation has retreated from its peak in 2022 on high interest rates, and that underlying price pressures reentered the RBA’s 2.0–3.0% target band for the first time since 2021 in Q1, where they are now expected to remain ahead. In addition, policymakers assessed that the recovery in private demand is likely to take longer than previously expected. On the geopolitical front, the RBA pointed to mounting uncertainty regarding the global economic outlook; the Bank expects the U.S. tariffs to dampen growth, employment and inflation in Australia. Still, the monetary authority pointed to signs of a persistently strong labor market, which will have likely dissuaded a larger cut.

Further cuts on the horizon: The RBA struck a more dovish tone than in previous meetings. It noted that upside inflation risks have eased, and that its policymakers had considered a “severe downside scenario” for Australia’s GDP growth. Moreover, in a subsequent statement, Governor Michele Bullock revealed that the Bank had mulled a 50 basis point cut during its meeting. Our Consensus is for two more quarter-point cuts, one in Q3 and another in Q4, as our panelists expect inflation to remain within target and GDP growth to be weak by pre-pandemic standards in 2025. Still, the spread on the end-2025 rate is wide at 2.85–3.60%: The outlook hinges on U.S. trade policy and its impact on the global economic outlook and supply chains. The Bank will reconvene on 7–8 July.

Panelist insight: EIU analysts commented: “We still expect the RBA to trim the [cash rate] twice more in 2025, in August and November. However, as we expect the shift in US trade policy to result in weaker imported inflation, we believe that the central bank will be able to make an additional 25-basis-point cut in the first quarter of 2026, taking the OCR down to a terminal rate of 3.1%.” Analysts at Goldman Sachs were more dovish: “From our perspective, the press conference marked a significant pivot away from the RBA's prior hawkish focus on a 'tight' labour market and upside risks to inflation. […] While the RBA's updated views are consistent with our own, the pivot in communication was more dovish than we expected. We now forecast sequential 25bp cuts in July and August followed by a final cut in November to a terminal rate of 3.1% (prior forecast: sequential cuts in July and August to terminal of 3.25%).”

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