Michele Bullock, governor of the Reserve Bank of Australia (RBA), speaks during a news conference at the bank’s head office in Sydney, Australia, on Tuesday, Apr. 1, 2025.
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Australia’s central bank cut its policy rate by 25 basis points to the lowest in two years as inflation concerns in the country continue to recede, giving room for the bank to ease monetary policy.
The Reserve Bank of Australia cut the benchmark rate to 3.85%, its lowest level since May 2023, in line with expectations from economists polled by Reuters.
While the RBA said that the upside risks to inflation had diminished “substantially,” the uncertainty over global trade policy will likely continue to weigh on the economy.
“Headline inflation is expected to increase over the second half of 2025 as temporary government subsidies to households are unwound, before returning to around the midpoint of the target range later in the forecast period,” the central bank said in its monetary policy statement.
Australia’s inflation has been on a downtrend, with the most recent headline inflation figure coming in at a four-year low of 2.4% in the first quarter of 2025. The RBA’s target range for inflation is between 2% and 3%.
However, the central bank cautioned that household consumption may recover at a slower pace than previously expected, resulting in subdued growth in overall demand and a sharper deterioration in the job market.
“There is a good chance that [the RBA] will cut rates further than we are currently anticipating [in] this cycle,” Abhijit Surya, senior APAC economist at Capital Economics, said in a note.
Surya, however, believes that the bank overestimated the extent to which its economy will be hurt by the widespread trade tensions.
The Australian economy has seen somewhat of a turnaround, with the most recent GDP reading showing a 1.3% year-on-year expansion in the fourth quarter and marking its first expansion since September 2023.
However, analysts, ahead of the RBA meeting, have highlighted downside risks for the Australian economy due to global trade tensions and uncertainty around the domestic economy.
In a May 16 note, HSBC analysts noted that “the global economy and financial markets have had tumultuous times” since the RBA’s last meeting on April 1, including the imposition — and subsequent suspension — of U.S. President Donald Trump’s “Liberation Day” tariffs.
The analysts forecasted a “modest negative growth impact” on the country, and said that the market shocks are likely slightly disinflationary for Australia.
This is due to weaker expected global growth and trade diversion of manufactured goods from China into non-U.S. markets, including Australia.
Carl Ang, Fixed Income Research Analyst at MFS Investment Management, also noted in a May 15 note that downside risks and uncertainty around Australia’s economic outlook have increased substantially, due to “Liberation Day” and global trade policies.
This will likely prompt a “tangibly dovish pivot from the RBA,” he said, forecasting that the central bank will reach a terminal rate of 3.1% in early 2026.
