The Reserve Bank’s May rate cut to 3.85% marked a turning point in its monetary policy stance, with RBA governor Michele Bullock characterising the move as a “confident cut.”
While the decision was widely anticipated by markets, it reflects growing confidence within the central bank that inflation is under control and that domestic risks now warrant further easing, according to Westpac’s Ryan Wells (pictured above left), Illiana Jain (pictured right), and Elliot Clarke (pictured below right).
Inflation has been confirmed in the target band and, on an underlying basis, is “expected to be around the midpoint” through to June 2027.
Westpac chief economist Luci Ellis (pictured above right) described the shift as anticipated, noting the RBA statement referred to policy as “somewhat less restrictive.” While still above neutral, the cash rate is edging closer to settings that no longer weigh heavily on activity.
Ellis stressed that “trimmed mean inflation was already running at an annual rate of 2½%” over the past two quarters—a key signal that price pressures are firmly anchored within target. She added that, given these figures, it “would have been hard to construct a case to hold the cash rate unchanged at a clearly restrictive level.”
The May Statement on Monetary Policy acknowledged slower-than-expected consumption growth and slight softening in labour market conditions. RBA adjusted its household consumption growth forecast from 2.6% to 1.9%, aligning more closely with private sector estimates.
“The pick-up [in household consumption] will be a little slower than was expected three months ago,” Wells, Jain, and Clarke said in Cliff Notes.
Bullock acknowledged that households were “being a little bit cautious,” a trend that’s also been tracked through Westpac’s Card Tracker and Consumer Panel data.
Although the labour market remains relatively tight, the board no longer sees it as a barrier to easing. In fact, internal models show RBA’s current NAIRU estimate remains high at 4.69%, above even the average of surveyed market economists.
Ellis noted this overestimation may have skewed previous inflation forecasts and acknowledged in her analysis that RBA “could be overestimating the NAIRU and underestimating full employment.”
RBA officials also cited external risks as part of the rationale for easing, particularly from China’s uneven growth and the ongoing US–China trade tensions.
Bullock stated that the domestic factors – lower inflation and downside risks to consumption – were enough to warrant May’s rate cut, but that the global backdrop strengthened the case further.
That the board considered a 50bp rate cut emphasises policy makers are willing to deliver further relief if/when the data and risks warrant.
Ellis noted that RBA now views the global trade conflict as disinflationary for Australia, a change from April’s statement, and expects China to remain committed to its 5% growth target for 2025. RBA’s own forecast is slightly below that at 4.8%.
Markets are now pricing in additional 25bp cuts in both August and November, which would lower the cash rate to a neutral 3.35% by year-end—consistent with Westpac’s base case outlook.
“With inflation inside the target range, and at its midpoint on some metrics, it would have been hard to construct a case to hold the cash rate unchanged...”
Ellis added that “the board has scope to move a lot should that be necessary,” but cautioned that there is “no need to rush or to accelerate the pace of easing.”
