The Reserve Bank of Australia has delivered its second rate cut of 2025, lowering the cash rate by 25 basis points to 3.85%.
The widely expected move has prompted economists to bring forward their forecasts for further easing amid soft consumer demand, global trade tensions, and slowing inflation.
Markets and major banks now expect the RBA to cut rates at least two more times this year — possibly as soon as July, with August and November also seen as live meetings.
“Ultimately, time will tell whether or not the bank needs to deliver additional rate cuts in line with that. Our own view remains that we will see another rate cut in August,” said Adam Boyton (pictured upper left), ANZ’s head of Australian economics.
“I don’t think the [RBA] will go in July, although markets have moved toward now expecting a July rate cut.”
“Overall, the board assesses monetary policy after today’s move to be ‘…somewhat less restrictive’. This opens the door to further easing,” said Sally Auld (pictured upper right), NAB group chief economist.
Westpac also expects two additional cuts this year — in August and November — totalling 50 basis points.
The May board statement signalled growing confidence in the inflation outlook.
Forecasts for trimmed mean inflation were revised slightly lower to 2.6%, while GDP growth for 2025 was downgraded from 2.4% to 2.1%. The RBA also now sees the unemployment rate peaking at 4.3%, up from 4.2%.
“The board judged that the risks to inflation have become more balanced,” RBA said in its statement.
RBA’s baseline forecast now assumes a cash rate of 3.4% by December, down from 3.5% in February. It is expected to fall further to 3.2% by mid-2026. These assumptions were used to underpin RBA’s updated economic projections.
In the event of a trade war escalation —RBA’s downside scenario — the cash rate could be pushed lower still, with inflation forecast to slow to 2% by end-2026.
Conversely, in an upside “Trade Peace” scenario, inflation is projected to remain above 2.5%, and the RBA may ease more cautiously.
Auld noted that RBA’s rhetoric had shifted in a dovish direction since April, now focusing on both price stability and full employment.
RBA’s May forecasts factored in a weaker global backdrop, particularly the impact of US-China trade tensions, which are now seen as disinflationary. Household consumption remains subdued and a key risk to the domestic outlook.
“There was a concern from the RBA's perspective that the uncertainty globally will have an impact on the domestic economy,” Boyton said.
“And while I think that's true, the question is 'How much of an impact?’”
RBA noted that policy unpredictability — particularly around tariffs — has made it difficult to estimate the full economic impact but added that these global developments are likely to weigh on both growth and inflation.
Westpac’s Luci Ellis (pictured lower left) said the central bank had now scaled back overly optimistic forecasts and was better aligned with private expectations.
“So, it’s not surprising and it’s good to see that their previous consumption forecasts, which were quite bullish, have now been scaled back,” Ellis said. “And of course they have responded to all the uncertainties from the trade war overseas.”
“Price increases have slowed, and it’s fairly broadly based, and this is very good news,” Bullock said.
The governor confirmed the board discussed both a 25bp and a 50bp cut but opted for a smaller move, leaving room to respond quickly if global conditions worsen.
“The board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome,” the RBA statement said.
CBA economist Belinda Allen (pictured lower right) said RBA would have room to cut quickly if the global picture worsens materially, suggesting July could be in play depending on the data.
“The risk lies with additional easing and a quicker easing and July cannot be ruled out,” Allen said. “But the RBA would have to see hard data for this to materialise.”
