RBA: Global Uncertainty Drives Forecasts Lower

The RBA cut rates 25bp to 3.85%, the lowest in two years, as was widely expected. The impact of current global uncertainty on economic decisions contributed to downward revisions to staff forecasts for GDP growth, inflation and employment but the outlook is significantly unclear. These downward adjustments, especially those bringing inflation closer to the band mid-point, gave the Board room to cut rates for a second time this year and opens the possibility of further easing depending on data and global developments but the RBA “remains cautious”.

• The decision to cut rates was made because Q1 trimmed mean CPI fell below the top of the 2-3% band, downward revisions to global growth and thus Australia’s resulted in lower employment gains and brought inflation closer to the band mid-point, of heightened uncertainty and a slower consumption recovery.
• The board noted that inflation risks were now “balanced” after being “on both sides” in April.
• Market OCR pricing used in forecasting was 20-30bp lower than in February and still drove a 0.1pp downward revision to underlying inflation bringing it to 2.6% across the horizon. Headline was adjusted to reflect not only softer growth but changes to the government’s electricity rebate but it now doesn’t exceed 3.0% helped by a materially lower oil price assumption.
• GDP growth was revised down 0.3pp in Q4 2025 to 2.1% as consumption is now forecast to grow 1.9% down from 2.6%. Business investment and exports are also lower while public demand and dwelling investment are now forecast to be higher. End-2026 GDP was little changed at 2.2% with stronger private consumption offsetting weaker public demand.
• The unemployment rate is forecast to peak 0.1pp higher at 4.3%, while employment growth was revised down 0.7pp to 2.1% in Q2 2025 (April +2.7% y/y) and -0.6pp to 1.4% y/y in Q4, but it reiterated that the labour market remains tight. Wages growth was revised 0.1pp lower across the horizon and productivity slightly higher.