The Reserve Bank of Australia is widely expected to deliver another 25 bp cut at its upcoming monetary policy meeting, potentially lowering the official cash rate to 3.85 per cent – a level not seen since mid-2023.
Market pricing via the ASX RBA Rate Tracker suggests a 96 per cent chance of a cut, with just 4 per cent anticipating a hold, as of 16 May.
HSBC chief economist Paul Bloxham said the RBA’s measured approach has successfully returned core inflation to target without triggering a recession or significant job losses.
“This is the good news. But there are deeper problems,” Bloxham said, pointing to weak productivity and falling per capita incomes. “To lift living standards, a revival of the private sector will be needed. Rate cuts will not be enough. Structural reform is needed.”
On the current rate decision, Bloxham said a cut would be a timely response to signs of slowing domestic growth – particularly in consumer spending – and rising global uncertainty stemming from a major trade policy shock likely to weigh on international economic momentum.
He, however, added that while he sees a 25 bp cut this week, “we expect the RBA will give little guidance about what it expects to do with its cash rate setting in coming meetings, given the high level of global uncertainty at present”.
“The RBA is typically highly circumspect about giving forward guidance – indeed, the governor, Michele Bullock, has stated in the past that the RBA does not give forward guidance as such. The current global trade policy shock, and the uncertainty it has created, make it even more unlikely that there will be much forward guidance delivered this week.”
Like Bloxham, Scott Solomon, co-portfolio manager of the T. Rowe Price Dynamic Global Bond Strategy, said the RBA remains on track to cut the cash rate by 25 basis points on Tuesday, and is expected to reiterate that there is no pre-determined path for future rate moves.
“With anchored inflation and a soft labour market, a gradual move towards neutral is justified, aligning with market expectations. We don’t expect meaningful RBA pushback. Instead, they’ll remind us there are a lot of scenarios that could potentially disrupt the market’s outlook. The fireworks will have to wait for another meeting,” Solomon said.
GSFM investment specialist, Stephen Miller, agreed the governor would maintain a cautious tone, avoiding signals of a guaranteed rate-cutting path despite growing risks.
“With inflation within the target 2 to 3 per cent band, and there being a reasonable prospect (but not the certainty) of some further decline, and with policy still in ‘restrictive’ territory, the most judicious course would seem a further 25 bp decline in the policy rate to 3.85 per cent,” Miller said.
“Recall that in the wake of the April policy rate cut, RBA governor, Michele Bullock, was at pains to quash any notion that cut was necessarily the start of a sequence of rate cuts at successive RBA meetings. That might eventuate, but as in April, the governor this time around will also wish (rightly in my view) to give herself and the board maximum optionality for future RBA board meetings.”
Looking further ahead, he added that while more cuts could bring rates near 2 per cent by year-end, this would signal mounting economic challenges rather than a positive outlook.
In line with the consensus view, Bob Cunneen, senior economist at MLC Asset Management, said there are many reasons why the RBA should cut interest rates, including subdued economic activity and falling inflation.
“The only other valid justification for the RBA keeping interest rates on hold is the view that Australia’s inflation risks are still problematic. Again, there is some evidence to support this assessment,” Cunneen said.
While a 25 basis point cut is widely expected, economists agree that the likelihood of a larger rate reduction on Tuesday remains very slim.
