The RBA's May meeting last week saw the cash rate cut by -25bps to 3.85%, as expected by Wilsons and the consensus (with 31 out of 33 economists forecasting a 25bps cut).
This followed the initial 25bps cut in February and the RBA's April meeting, which held the cash rate unchanged. The RBA now meets roughly every six weeks, rather than monthly.
In its statement, the RBA noted that inflationary pressures have continued to ease, and both headline and underlying inflation are within the 2–3% range. The RBA also noted that the unemployment rate has remained steady and employment growth has remained firm, but the pick-up in household consumption seems to be a bit softer than previously expected.
| Dec-24a | Dec-25 | Dec-26 | |
| GDP Growth | 1.3 | 2.1 | 2.2 |
| Previous | 1.1 | 2.4 | 2.3 |
| Unemployment | 4 | 4.3 | 4.3 |
| Previous | 4 | 4.2 | 4.2 |
| Trimmed mean inflation | 3.3 | 2.6 | 2.6 |
| Previous | 3.2 | 2.7 | 2.7 |
Source: Refinitiv, Wilsons Advisory.
Global Risks Help Tilt the RBA Toward Lower Growth Estimates and Lower Rates
The RBA highlighted that the global economic outlook has worsened, following the introduction of higher tariffs by the United States and a significant increase in uncertainty related to trade policies. This is expected to weigh on Australia’s domestic activity and inflation in the forecast period, slowing the pick-up in GDP growth slightly.
The RBA downgraded its growth forecasts for this year (from 2.4% to 2.1%), due to recent weaker growth in consumer spending and business investment, as well as rising global uncertainty. It now also sees slightly higher unemployment (4.3% from 4.2%) while also revised down its underlying (or trimmed mean) inflation forecasts to 2.6% (from 2.7%).
The continuation of the RBA rate cutting cycle is likely to support a modest uptick in Australian economic activity.
However, the RBA’s expectations for growth in CY25 and CY26 are tepid in the context of Australia’s longer term GDP growth performance.
RBA Governor Bullock's post-cut press conference was on the dovish side. Governor Bullock stated the RBA "remains prepared to take further action, if that is required”. In reference to their slightly downgraded economic forecasts and the consequences for their policy outlook, Bullock noted that “some of this reflects the downgrade to global growth." Importantly, the RBA's reaction to tariffs is now taking a more dovish tilt, by arguing "global trade developments will overall be disinflationary for Australia." During Q&A, Bullock stated that the -25bps cut was a "consensus decision". However, Bullock noted the board discussed two options: "hold or lower"; although the "hold was put aside quickly", while the discussion of the size of the cut was between -50bps and -25bps.
It is worth noting that even after the latest rate cut, monetary policy is still judged to be restrictive by the RBA. It’s viewed as being only “somewhat less restrictive”, with the cash rate still above most of the RBA’s estimates of the neutral rate, which now averages around 2.8%, This in turn provides plenty of scope for further rate cuts to get monetary policy back to neutral. However, the “neutral rate” is something of an abstract concept subject to frequent re-estimation. The market has the cash rate bottoming out at ~3.1%. We see the bottom of the cash rate cycle at 3.35% but risks over the coming year appeared skewed to a moderately lower cash rate bottom. We still expect another two reductions of -25bps in each of Aug-25 and Nov-25, to reach the terminal trough of 3.35%. This would equate to a cumulative -100bps easing cycle in 2025. The markets view of a terminal cash rate of 3.1% within the next 12 months suggests Australian 10 year bonds are attractive at 4.4%. We stay overweight domestic fixed interest. The RBA's comments however were dovish enough to now suggest there is potentially some downside risks around our view (i.e. there is now a chance of 3 more cuts this year).
Still Just Two More Cuts This Year as Our Base Case
However, we feel the RBA's next meeting on Jul-25 is still unlikely to see a rate cut. This is because the RBA has seemingly reverted to easing only at the meetings after the quarterly CPI (and with Governor Bullock downplaying the monthly inflation indicator due to volatility).
Hence, we believe the next 'live' meeting is Aug-25. The key (domestic) data releases to watch are: 1) the quarterly CPI for Q2-25 due late July; and 2) the monthly labour market surveys. For now, it seems the RBA's reaction function remains that if the outcomes are close enough to their expectations, they are likely to keep cutting rates. Specifically, when Bullock was asked about 'what would it take for the RBA to cut further?', Bullock said "if we continue to observe inflation coming down". That said, the risks to our view of the RBA’s stance remain more driven by global uncertainty. Specifically, the timing and magnitude of US tariffs remains highly uncertain. Meanwhile, on the hawkish side, we highlight that domestic fiscal policy remains quite stimulatory. However, the RBA did not say much in respect of how it is weighing the impact of ongoing fiscal stimulus.
Stronger medium-term growth needs more than just rate cuts
Last week’s cut to interest rates comes less than three weeks after the Albanese Government decisively secured a second term, with Treasurer Jim Chalmers noting that a focus of the coming three years will “be about productivity without forgetting inflation.” The intention to focus on improving Australia’s lacklustre productivity growth is welcome. The RBA continued to note in its statement that productivity growth has not improved. However, after three years where productivity was rarely discussed by the government, the proof will be in the pudding.
RBA more focused on global risks
The RBA was clear to acknowledge that global risks and uncertainties have risen since their February statement. Indeed, the RBA used the word uncertain, or uncertainty, 132 times in its 68-page Statement of Monetary Policy.
The Board recognised that “uncertainty in the world economy has increased over the past three months”. Volatility in financial markets and uncertainty about the final scope of tariffs in the United States are key risks to the outlook. Discerning the extent to which these uncertainties change expectations for the Australian economic outlook is a key challenge for the RBA at present, but it appears to have encouraged the RBA to trim its growth outlook at the edges and deliver more dovish guidance.
The RBA’s Statement on Monetary Policy (SoMP) highlights the RBA’s view that Australia is not immune to shifts in global trade policy. The major implications for Australia are likely to be through indirect trade and financial market channels. Notably, a structural slowdown in China could be exacerbated by tariffs. A deterioration of growth in China would weigh on Australian exports. However, it could also mean access to cheaper goods in Australia, and softer inflation. For now, China demand appears to be holding, with the key iron ore price proving relatively stable.
Easing Cycle Positive at the Margin for Growth Assets
We expect the monetary easing cycle to, all things equal, be a positive for domestic equities. However, we expect a volatile ride and more modest overall returns over the coming year. Australian equities have delivered 10.6% (total return) in the 12 months to May 21st, against a backdrop of zero earnings growth in FY25. RBA rate cuts are on balance positive for Australian shares, because they help boost future profit growth and make shares relatively more attractive relative to cash. However, this assumes a US/global recession can be avoided. This is still our base case, but risks are elevated.
The experience since 1995 suggests stocks rise an average of 8% (price return) in the 12 months following the first RBA rate cut. However, this masks a large range, with global conditions the key swing factor.
Valuations appear stretched, and Trump’s trade war and the precarious US fiscal backdrop will no doubt make for more volatility. However, the continuation of rate cuts and a modest improvement to the local earnings cycle still point to a central case of reasonable gains on a 12-month view.
Positive for property too, but we expect only modest gains in home prices over the coming year
Lower rates are typically positive for home prices, as they increase the amount a borrower can borrow which supports demand. However, this cycle has been an unusual one. National property prices have already moved up 15% over the past two years, and housing affordability remains poor. This suggests only a modest (low single digit) improvement in average house prices over the coming year. Non-residential property looks cheaper and has scope to deliver stronger returns, though as always asset selection will be important.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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