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The Reserve Bank sliced the cash rate by a quarter of a percent to 3.85% today in a widely anticipated decision. It is the lowest cash rate in almost two years and follows a rate cut in February that marked the start of the current easing cycle. Importantly, the dovish tilt in the accompanying statement, the rhetoric from the Reserve Bank Governor in her press conference and the forecast revisions suggest more rate cuts are on the way. We expect three more rate cuts over the rest of this year, taking the cash rate to 3.10% by the end of 2025. A deeper rate-cutting cycle can’t be ruled out amid heightened volatility and uncertainty around US tariffs. Markets are priced for the next cut to materialise in August, but we expect it could come earlier in July, especially as the Board did discuss a bigger half a percent cut today.
The trifecta of softer inflation, sluggish consumer spending growth and a weaker global economic outlook undoubtedly sealed the deal. Underlying inflation fell to 2.9% year-on-year in the latest quarter, moving into the Reserve Bank’s 2-3% target band for the first time in three years. Growth in consumer-spending volumes have stalled and in per capita terms shrunk in the March quarter, spelling the end of a modest recovery through the second half of last year. Consumers have also stayed cautious. But it was the uncertainty and disruption to trade and supply chains unleashed by Trump’s tariffs that likely left the RBA with little indecision in the boardroom. The Governor confirmed a bigger cut was discussed, but consensus rested with a cut of a quarter percent.
The jumbo jobs report last week and the pause in tariffs meant a super-sized 50-basis-point cut today was not likely. Employment data revealed jobs jumped by 89,000 in April – the largest increase in over a year and the unemployment rate continued to hover at a low rate of 4.1%. It runs alongside soft productivity.
The RBA notes that uncertainty in the world economy has increased and this has had an adverse impact on global activity and contributed to a weaker outlook for growth, employment and inflation in Australia. With the global multilateral trade system upended, the downside risks to global growth are front and centre. Sure, Trump paused reciprocal tariffs on most countries on 9 April and recently agreed to a 90-day truce with China, but damage has already been done. Trust in the US Administration has been broken. While the tariff rollback may offer temporary relief, it does little to restore the credibility lost through unpredictable trade policies. Moreover, uncertainty lingers around the outcome after the 90 days expires.
Even if Trump withdraws reciprocal tariffs in July, tariffs will remain higher than before Trump became President, as the new normal of 10% US tariffs across the board shakes out. China is still facing tariffs of 30-40% even if the reciprocal tariffs are scrapped and there is also the issue of tariffs on specific sectors. Supply chains, prices, business investment and hiring decisions are impacted. What happens in the world’s largest and second largest economies will not leave others immune, including Australia.
The RBA seemed alert to the downside risks from tariffs and highlighted that it was not just the situation was uncertain, but that it was also unpredictable. The RBA Governor in the press conference stressed they need to be alert to bad outcomes and in a “really bad” outcome, a recession (i.e. the ‘R word’) couldn’t be ruled out. The RBA also updated its judgement on the impact on inflation from US tariffs and said it is disinflationary for Australia. This is a shift from their previous judgement in February when they said inflation could move in either direction.
In terms of the domestic economy alone, that is, ignoring tariffs and the global economy, there were two areas keeping the RBA preoccupied: the jobs market and consumer spending. The RBA is surprised by the ongoing strength of the labour market and the slow recovery in household spending. The rate cut today will deliver lower mortgage repayments (see table below) and should help improve consumer spending growth provided consumers can shake their caution.
| Change in repayments | |||
| Loan size | Old monthly mortgage | New monthly mortgage | Decline in monthly repayments |
| $200,000 | $1,282 | $1,251 | $31 |
| $300,000 | $1,922 | $1,877 | $45 |
| $400,000 | $2,563 | $2,502 | $61 |
| $500,000 | $3,204 | $3,128 | $76 |
| $750,000 | $4,805 | $4,692 | $113 |
| $1,000,000 | $6,407 | $6,255 | $152 |
*Note: assumes an owner-occupier paying principal and interest with 25 years remaining on the loan
These two considerations make it harder to answer the question of how deep the central bank will cut the cash rate amid the uncertain global backdrop. And this is, really, the big question that needs answering?
In the press conference, Michele Bullock posed the question, “Does it mean we head into a long series of rate cuts?” Her response to her own question was that it is uncertain.
Let us consider history, although we acknowledge history is not always a good guide and the shock this time centres around trade, which is different to previous shocks. Since inflation targeting began (informally) in 1993, there have been five distinct rate-cutting or easing cycles. The deepest was during the global financial crisis where the cash rate was cut by 4.25 percentage points or 425 basis points, from 7.25% to 3.00%. The shallowest was amid the height of the covid crisis when the 2011-2016 easing cycle resumed in June 2019 and the cash rate was cut 140 basis points to 0.10%.
Right now, financial markets are fully priced for two more cuts in 2025. Markets are pricing in a cash rate of 3.10% by around February next year. A cash rate of 2.85% before June 2026 is only partially priced. That suggests on current pricing, markets are anticipating the smallest easing cycle since inflation targeting began amid a change in the global trading paradigm.
| Reserve Bank easing cycles | ||||
| Start date | End date | Peak cash rate | Trough cash rate | Total easing (percentage points) |
| Jul-96 | Dec-98 | 7.50% | 4.75% | 2.75 |
| Feb-01 | Dec-01 | 6.25% | 4.25% | 2.00 |
| Sep-08 | Apr-09 | 7.25% | 3.00% | 4.25 |
| Nov-11 | Aug-16 | 4.75% | 1.50% | 3.25 |
| Jun-19 | Nov-20 | 1.50% | 0.10% | 1.40 |
| Feb-25 | 4.35% | |||
The Reserve Bank alongside its decision today published its quarterly Statement on Monetary Policy alongside the decision, which provided fresh macroeconomic forecasts. The revisions to forecasts include softer inflation, higher unemployment, weaker consumer spending growth and weaker economic growth over the horizon period (see table below). These revisions suggest the RBA is less concerned about upside inflation risks and its language and rhetoric confirmed that.
| Reserve Bank economic forecast | |||||
| Percentage change through the four quarters shown* | |||||
| Jun-25 | Dec-25 | Jun-26 | Dec-26 | Jun-27 | |
| New forecasts | |||||
| Gross domestic product (GDP) | 1.8 | 2.1 | 2.2 | 2.2 | 2.2 |
| GDP of major trading partners | 3.4 | 2.8 | 3.0 | 3.3 | 3.3 |
| Unemployment rate (quarterly, %) | 4.2 | 4.3 | 4.3 | 4.3 | 4.3 |
| Wage price index | 3.3 | 3.3 | 3.1 | 3.0 | 3.0 |
| Inflation (trimmed mean) | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 |
| GDP of major trading partners | 3.4 | 2.8 | 3.0 | 3.3 | 3.3 |
| Previous forecasts | |||||
| Gross domestic product (GDP) | 2.0 | 2.4 | 2.3 | 2.3 | 2.2 |
| GDP of major trading partners | 3.5 | 3.3 | 3.3 | 3.4 | 3.3 |
| Unemployment rate (quarterly, %) | 4.2 | 4.2 | 4.2 | 4.2 | 4.2 |
| Wage price index | 3.4 | 3.4 | 3.2 | 3.1 | 3.1 |
| Inflation (trimmed mean) | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 |
*Unless otherwise specified
Disclaimer
The information in this presentation is general in nature and has not been prepared for any one individual or organisation. The information should not be used or treated as professional advice and viewers should make their own enquiries and seek professional advice concerning their own personal circumstances before utilising any information provided in this presentation. All examples provided are for demonstration purposes only.
