Australia’s central bank is widely expected to deliver a 25-basis-point rate cut at its upcoming monetary policy meeting on May 20, with Westpac economists citing shifting global dynamics and softer domestic data as key drivers.
At the same time, underlying inflation remains contained despite a sharp rise in electricity prices, setting the stage for a policy pivot aimed at supporting economic momentum.
Westpac group chief economist Luci Ellis (pictured left) said the Reserve Bank is all but certain to cut the official cash rate to 3.85% in May, regardless of how the upcoming March quarter consumer price index figures land.
Ellis noted that while RBA had previously leaned heavily on data in its decision-making, global developments and softer-than-expected domestic indicators have shifted the risk outlook sharply to the downside.
“The turmoil abroad has, however, changed the game and flipped the risks,” she said. “You can lock in a 25bp cut in May, even if the Q1 inflation data are a shade disappointing.”
Westpac’s modelling reflects a slowdown in labour market strength and wage growth, which have come in below RBA’s February forecasts.
“Business survey indicators of labour market tightness... have taken another leg down in the first quarter of 2025, after stalling in the second half of last year,” Ellis said.
Additionally, consumption forecasts are expected to be revised as RBA contends with growing doubts around its optimistic 2025 household spending outlook.
“As that bullish view is challenged by the data flow, including next week’s retail sales release, we expected the RBA to revise its view of the outlook, and so the appropriate policy response.”
Despite the shift in tone, Ellis dismissed the idea of aggressive policy moves in the short term.
“We do not regard an inter-meeting cut or a 50bp cut as plausible, contrary to some of the more breathless commentary,” she said.
Ellis confirmed Westpac’s base case for a total of three 25bp cuts in 2025—in May, August, and November—but acknowledged that risks now skew toward a faster and potentially deeper easing cycle, especially if overseas economic conditions worsen.
In a separate analysis, Justin Smirk (pictured right), Westpac senior economist, offered a preview of the March quarter CPI.
While headline inflation will be affected by a 14.5% surge in electricity prices, largely due to the expiration of the Queensland $1,000 energy rebate, this is not expected to materially influence RBA’s underlying inflation gauges.
“Based on the January and February Monthly CPI, and having pencilled in a 5% increase for the month of March, Westpac expects electricity prices to rise 14.5% in the March quarter,” Smirk said.
Despite this, the trimmed mean CPI—RBA’s preferred core inflation measure—is forecast to rise just 0.6% for the quarter, or 2.8% annually.
“Our trimmed mean estimate for the March quarter is 0.6%qtr/2.8%yr which will see the six-month annualised pace drop from 2.7%yr to 2.3%yr, that is from the upper half to the lower half of the RBA’s target band,” Smirk said.
While energy-related CPI components have temporarily distorted the inflation outlook, Westpac’s research underscored the ongoing impact of government cost-of-living rebates in suppressing headline inflation figures.
“Cost-of-living measures held down inflation in the CPI from 2022 into the first half of 2025,” Smirk said.
However, he warned that these effects will begin to reverse in late 2025 and early 2026, as assistance fades and underlying prices trend higher.
“As they end and underlying prices are now higher than they were pre the assistance measures, they will boost inflation through the second half of 2025 and into 2026,” Smirk said.
Westpac’s CPI forecast for the March quarter is 0.7% q/q or 2.2% y/y, the slowest annual pace since March 2021.
However, Smirk acknowledged upside risks stemming from unknown price components including childcare, pharmaceuticals, and medical services.
“Our March quarter CPI estimate is 0.7%qtr/2.2%yr... but we highlight a possible upside risk,” he said.
Still, Smirk reiterated that inflation remains within RBA’s 1–3% target range, giving the central bank room to continue its easing cycle.
With global conditions deteriorating, the labour market softening, and core inflation stabilising, RBA is widely expected to lower rates by 25bps in May—with additional cuts likely later in the year.
“Holding rates steady in the face of the global turmoil and softer momentum in the labour market – for the sake of 0.2ppts on inflation – would be very hard to explain,” Ellis said.
