The Reserve Bank of Australia (RBA) cut interest rates by 25 basis points yesterday to 3.85%, reaching a 2-year low as inflation continues to trend downwards. The RBA’s move eased some concerns around the central bank’s ability to manage rising global trade risks, with more expectations of rate cuts.
The interest rate decision was widely expected by markets. Dovish remarks from Governor Michele Bullock fueled expectations of more rate cuts in 2025.
Progress on Inflation and Economic Picture
Lowering rates was determined by progress in bringing inflation down. Headline CPI for Australia came in steady at 2.4% in Q1, while core inflation dropped from 3.3% in Q4 2024 to 2.9% in Q1 2025, in range of the RBA’s 2-3% target. The inflation figures mark a decline from the 2022 peak of 6.8%. ⁽¹⁾
In its quarterly Statement on Monetary Policy, released on Tuesday, the RBA also said inflation would be lower, growth would slow, and unemployment could extend higher due to the effects of global trade tensions, prompting the bank to signal readiness to respond decisively if risks intensify. ⁽²⁾
Governor Michele Bullock stated that the RBA has been successful in managing inflation while keeping the labor market strong, with the unemployment rate remaining steady at 4.1%.
Risks From Rising Trade Tensions
The RBA’s cut was also due to trade tensions, caused by US President Trump’s tariff standoff with China, which have impacted financial markets and could raise concerns of recession.
The US and China have agreed to reduce tariffs on each other’s goods for 90 days, but the uncertainty continues to weigh on Australia, which is a major trade partner to China.
Australia’s economy may continue to be strong, but challenges remain for their growth outlook. That include weak productivity growth, which could spark renewed inflation pressures if wage growth rises. ⁽³⁾
The US baseline tariff of 10% on Australian imports remains in place, despite pressure from Australian Prime Minister Anthony Albanese to eliminate it. Australia has refrained from introducing retaliatory tariffs in response to US action, which include bigger levies on imports of its steel and aluminum. ⁽⁴⁾
China’s broader policy response would have implications for Australia. Any effort by Beijing to stimulate its economy through infrastructure spending could benefit Australia, which counts iron ore as its number one export.
China could redirect goods to Australia that had been earmarked for US consumers and accept lower prices for them, which would have a deflationary effect. However, a sharp slowdown in China’s economy could dampen market sentiment and reduce demand for Australian products. ⁽⁵⁾
Market Reactions and Expectations
Traders are now speculating a 60% chance of another rate cut in July, with an August cut fully priced in as they reacted to a dovish RBA. Analysts expect interest rates to reach 3.1% rather than 3.35%, reflecting growing confidence in further easing. ⁽⁶⁾
The Australian dollar declined 0.5% alongside the New Zealand dollar, which fell 0.2%, as markets anticipate a quarter-point cut by the Reserve Bank of New Zealand to 3.25% on May 28. The ASX index rose 0.63% throughout the day.
The RBA also released new forecasts for the economy that showed it expected inflation to be slightly lower, and unemployment higher, even assuming rate cuts of 85 basis points. ⁽⁷⁾
