Australia’s central bank cut its policy rate by 25 basis points to the lowest in two years as inflation concerns in the country continue to recede, giving room for the bank to ease monetary policy.
While the RBA said that the upside risks to inflation had diminished “substantially,” the uncertainty over global trade policy will likely continue to weigh on the economy.
Australia’s inflation has been on a downtrend, with the most recent headline inflation figure coming in at a four-year low of 2.4% in the first quarter of 2025.
However, the central bank cautioned that household consumption may recover at a slower pace than previously expected, resulting in subdued growth in overall demand and a sharper deterioration in the job market.
This will likely prompt a “tangibly dovish pivot from the RBA,” he said, forecasting that the central bank will reach a terminal rate of 3.1% in early 2026.
With inflation worries in the nation continuing to fade, Australia’s central bank lowered its policy rate by 25 basis points to the lowest level in two years, allowing the bank to loosen monetary policy.
Following the forecasts of Reuters’s poll of economists, the Reserve Bank of Australia lowered the benchmark rate to 3.85 percent, the lowest level since May 2023.
Even though the RBA stated that the upside risks to inflation had “substantially” decreased, the economy will probably still be affected by the uncertainty surrounding global trade policy.
According to the central bank’s monetary policy statement, “Headline inflation is expected to increase over the second half of 2025 as temporary government subsidies to households are unwound, before returning to around the midpoint of the target range later in the forecast period,”.
The headline inflation rate in Australia has been declining; in the first quarter of 2025, it hit a four-year low of 2.4 percent. The RBA has set a target inflation range of 2 to 3 percent.
The central bank did, however, issue a warning that household consumption might rebound more slowly than anticipated, which would lead to a more severe decline in the labor market and a quieter expansion in total demand.
“It is likely that [the RBA] will lower interest rates more than we are currently expecting [in] this cycle,” wrote Abhijit Surya, a senior APAC economist at Capital Economics.
However, Surya thinks the bank overestimated how much the pervasive trade tensions would harm its economy.
With the most recent GDP reading indicating a 1.3 percent year-over-year expansion in the fourth quarter—its first expansion since September 2023—the Australian economy has experienced a slight recovery.
Prior to the RBA meeting, analysts have pointed out negative risks for the Australian economy because of the uncertainty surrounding the domestic economy and the tensions in global trade.
For example, since the RBA’s last meeting on April 1, “the global economy and financial markets have had tumultuous times,” including the imposition — and subsequent suspension — of U.S. A. “Liberation Day” tariffs imposed by President Donald Trump.
The market shocks are probably going to have a minor disinflationary effect on Australia, according to the analysts, who also predicted a “modest negative growth impact” on the nation.
Poorer than anticipated global growth and trade diversion of Chinese manufactured goods into non-U.S. markets are the causes of this. S. markets, one of which is Australia.
In a note dated May 15, Carl Ang, Fixed Income Research Analyst at MFS Investment Management, also pointed out that “Liberation Day” and international trade policies have significantly raised downside risks and uncertainty surrounding Australia’s economic outlook.
He predicted that this would lead to a “tangibly dovish pivot from the RBA,” with the central bank reaching a terminal rate of 3.1 percent in early 2026.
