MNI RBA WATCH: Board To Cut 25bp, Shift Focus To Global Risks

The Reserve Bank of Australia board is likely to cut the 4.1% cash rate by 25 basis points when it meets over May 19-20, as it grapples with supporting an economy buffeted by global uncertainty while maintaining its cautious hold on inflation.

Markets have fully priced in the move, which would be the second rate cut this year and bring the cash rate to its lowest level since May 2023.

The global economy has shifted significantly since the board last meet on April 2, when it held the cash rate just before U.S. President Donald Trump unveiled his reciprocal-tariff regime, which included significant duties on all China imports that were ratcheted up to 145% over the proceeding days.

While markets have bounced back following the U.S.’s rollback of most of the China tariffs, the Reserve will seek to proactively loosen policy as an insurance against slower global growth. (See MNI: RBA To Chart Neutral Path As Global Concerns Mount)

Governor Michele Bullock will also use the accompanying Statement on Monetary Policy to update forecasts and recalibrate the RBA’s message, striking a more balanced tone between domestic resilience and global risks.

DOMESTIC DATA 

Australia’s economic data continue to cool in line with the RBA's forecasts, supporting the case for a soft landing and reducing the need for restrictive rates. 

Underlying inflation slowed to 2.9% year-on-year in Q1, re-entering the RBA’s 2-3% target band for the first time since late 2021. (See chart)

Additionally, wages rose 0.9% in the March quarter (3.4% y/y), driven mainly by the public sector. Private sector wages rose just 3.3% y/y – flat compared to the previous quarter – highlighting limited pressure on inflation from labour costs.

The labour market also remains tight, with over 89,000 jobs added in April. Yet unemployment held steady at 4.1%, indicating strong participation and continued hiring demand.

NEUTRAL PATH

The RBA’s updated forecasts will offer more clarity on how restrictive it sees the current policy stance, particularly through revised estimates for the output gap, unemployment, and GDP growth.

Markets expect the cash rate to fall to 3.32% by December, implying two more cuts after May – likely in August and sometime in Q4.

However, the RBA’s assessment of global risks, especially in light of the temporary China-U.S. trade truce, could shift those expectations. The outlook for inflation, jobs, and growth in a volatile external environment will be central to the RBA’s next moves.