Bullock delivers 'right decision at this point in time', while staying alert to global shock

Governor Michele Bullock said the board debated a larger move but settled on a cautious 25 basis point cut, while warning the RBA remains on high alert for a global financial shock.

The Reserve Bank (RBA) eased the cash rate by 25 basis points to 3.85 per cent, marking its second reduction since the tightening cycle began in 2022. The move comes amid a sustained moderation in inflation and growing uncertainty in the global economic landscape.

Governor Bullock described the decision as “a confident cut” and “the right decision at this point in time”, while cautioning that the path ahead remains uncertain.

Speaking after Tuesday’s board meeting, Bullock said the RBA weighed two options: holding or cutting. The case to stay on hold was “quickly ruled out”, she said, with the board also debating a larger 50 basis point cut. Ultimately, it settled on a 25-point move as the “appropriate” response for now.

While global volatility dominated the backdrop, Bullock said domestic conditions had aligned in favour of a cut - albeit the labour market remains tight and productivity growth has not improved - noting the board’s decision “does not preclude further action in the future”.

Namely, trimmed mean inflation eased to 2.9 per cent in the March quarter, slipping below 3 per cent for the first time since 2021, while headline inflation came in at 2.4 per cent - both within the RBA’s 2-3 per cent target band.

The central bank now expects inflation to stay near the midpoint of that range over much of the forecast period. However, it flagged a likely short-term bump in headline inflation as earlier temporary factors unwind.

In its statement, the RBA cited “increased uncertainty in the global economy” due to market volatility, shifting trade policy, and geopolitical tensions. These risks are weighing on business and household sentiment and pose downside risks to growth, it said.

“These developments are expected to have an adverse effect on global economic activity,” the RBA said. “This has also contributed to a weaker outlook for growth, employment and inflation in Australia.”

Elaborating on this at the press conference, Bullock confirmed the central bank is on high alert for a global financial shock and acknowledged the mounting risk of international disruption, particularly from tariff policy shifts under the Trump administration.

Asked directly whether the RBA was on alert for a catastrophic global market event, Bullock didn’t hesitate.

“We are on the alert for that,” she said. “We’re paid to worry about that sort of thing. And we have been watching that very closely, as have other central banks all around the world.”

She said the RBA’s scenario analysis, released in the May Statement on Monetary Policy, includes extreme outcomes, including the possibility of a recession in Australia in the event of a significant global shock.

"But that's in the very extreme circumstance. And again, it was to try and give ourselves some sort of spectrum of outcomes that we might be looking at at the moment. We're not looking at that, but we need to be alert,” she said.

Namely, in its May SMP, the RBA modelled two global scenarios to gauge potential domestic impacts: a worsening trade war, and a breakthrough in trade peace.

In the “trade war” scenario, GDP contracts in early 2027, with the unemployment rate drifting toward 6 per cent and inflation falling to 2 per cent by mid-2027.

In contrast, the “trade peace” scenario projects a more robust recovery in domestic demand relative to baseline forecasts, with a "re-emergence of the concerns outlined in the February [SMP] of excess demand in the labour market and the economy, leading to inflationary pressures".

Economists see room for more cuts

Economists broadly interpreted the RBA’s latest communication as dovish, a characterisation with which Bullock agreed, though she stopped short of committing to a series of rate cuts.

Betashares chief economist David Bassanese said he sees the “neutral” rate at around 3.35 per cent, suggesting scope for two further cuts this year, depending on how inflation evolves.

“If global tariff uncertainty leads to greater weakness in global and local economic growth, the RBA will likely cut by more – but at this stage, this is not my base case,” Bassanese said.

“The openness of the Trump Administration to lower tariffs in exchange for trade deals has been a major development in recent weeks, and should be enough to avoid the US tumbling into a serious recession. But if the US does fall into recession, the RBA could easily cut rates into expansionary territory – as far as 2 per cent or even lower.”

CreditorWatch chief economist Ivan Colhoun also detected a dovish tone in the RBA’s forecasts and commentary but noted significant uncertainty surrounding the ultimate direction of US tariff policy.

“It’s not unreasonable to expect two to three more interest rate cuts this year,” Colhoun said.

State Street Global Advisors’ APAC economist Krishna Bhimavarapu said first-quarter GDP growth is likely to stagnate, based on leading indicators, and warned that weaker-than-expected data could increase the likelihood of the cash rate falling to its forecast of 3.10 per cent by December.

“Global trade dynamics are looking to be reset with fast paced discussions between many countries and in that regard, we look forward to similar initiations from Australia,” he added.

AMP's Shane Oliver was a little more conservative than Bhimavarapu in his market note, forecasting cuts in August, November, and February next year - taking the cash rate to 3.10 per cent.

"There is now close to a 50 per cent probability of another cut as early as July though," he said on Tuesday afternoon, highlighting that Bullock is no longer pushing back against market expectations for further easing as was the case in February.