Lock it in, no need to wait for the CPI: RBA Monetary Policy Board expected to cut by 25bps at its 20 May meeting.
For the past several quarters, the near-term outlook for RBA policy has been data-driven. This makes it tricky to predict what the Monetary Policy Board will decide beyond the upcoming meeting. You cannot be sure until you have seen the latest data. For example, had the Q4 2024 trimmed mean inflation not surprised on the downside, the Board would probably have remained on hold at the February 2025 meeting. The turmoil abroad has, however, changed the game and flipped the risks. You can lock in a 25bp cut in May, even if the Q1 inflation data are a shade disappointing.
A few months ago, the RBA’s main concern was that a still-tight labour market would keep domestic inflation pressures sticky. The risk was that the last 0.2% of inflation – the difference between their February forecasts for trimmed mean inflation and their goal of 2.5% – would not be eliminated.
Our analysis of the situation has for some time been that the RBA would nonetheless continue to cut rates at a moderate pace, as the data flow continued to surprise it on the dovish side, as has been the case recently. Wages growth has already undershot the RBA’s February forecasts and the labour market looked a bit less strong in February and March. We take particular note of the business survey indicators of labour market tightness, which have taken another leg down in the first quarter of 2025, after stalling in the second half of last year.
In addition, the RBA’s forecasts for consumption growth over 2025 still look very strong relative to the view of other observers, including our own forecasts. As that bullish view is challenged by the data flow, including next week’s retail sales release, we expected the RBA to revise its view of the outlook, and so the appropriate policy response.
Without the developments abroad though, the risks around this base case view were skewed to the upside. Given the RBA’s analysis of the economy, it was more likely that they would cut less or more slowly than our base case, than that they would go faster.
Now, however, uncertainty has escalated to a whole new level and the risks have completely flipped. Even though we do not expect the US administration to implement tariffs at the rates originally announced, some damage has already been done. Global growth – and especially US growth – will be slower; the response of China will be disinflationary for the world outside the US; and uncertainty is likely to delay decisions on some investment projects.
For this reason, we lock in our view that the Board will cut the cash rate by 25bps to 3.85% on 20 May. Holding rates steady in the face of the global turmoil and softer momentum in the labour market – for the sake of 0.2ppts on inflation – would be very hard to explain.
For the time being, we continue to expect a total of three further cuts (75bps in total), including the cut in May, with August and November pencilled in for the other two cuts. However, the risks on timing and extent are now skewed to the RBA moving faster than this and / or going further.
We do not regard an inter-meeting cut or a 50bp cut as plausible, contrary to some of the more breathless commentary. As we have been highlighting for some time, Australia is relatively less affected by US tariffs than some economies, and the hit to domestic growth is expected to be moderate. While the risks have clearly shifted to the dovish side, we do not expect the RBA’s thinking to pivot directly from cutting reluctantly if at all, to going hard in May and signalling more. To do so would look panicky and is contrary to the limited RBA communication since the ‘Liberation Day’ tariff announcements, which was much more circumspect.
If the Board were to do something other than cut by 25bps in May, it might consider a 35bp move to 3.75%, and round quarter-point levels of the cash rate. To be clear, we regard this as a very outside chance. The RBA has long emphasised that quarter-point neatness is not a consideration for policy. (It was, after all, me in my old job who would theatrically exclaim ‘we don’t care!’ whenever I was asked about getting the cash rate back to round quarter points. Nowadays I just change the pronoun and exclaim ‘they don’t care!’.) But there is one slight niggle to that understanding: the RBA is implementing a revised ‘ample reserves’ model for monetary policy implementation, and from May will no longer announce the exchange settlement funds rate as part of its policy announcements. So, if they were ever going to move back to a cash rate level at round quarter-points, the upcoming meeting is a good time to do it.
Again, though, this is a very outside chance. Lock in the 25bp move in May, and be ready to pivot thereafter should the overseas news worsen.
