The Reserve Bank of Australia (RBA) is preparing to drop interest rates for the first time in more than two years. Early forecasts indicate that it will cut rates by at least 25 basis points at its next meeting, currently scheduled for May 20. The RBA’s preferred trimmed mean Consumer Price Index (CPI) has just touched the edge of their 2-3% inflation target. This milestone is the first time since the fourth quarter of 2021 that this ambitious target has been met.
The RBA’s recent analysis shows that while headline inflation increased by 2.4% year-on-year, slightly above the estimated 2.2%, the trimmed mean CPI, which is the bank’s preferred measure, grew by 2.9% year-on-year. Yet this is a major turn, as it’s the first time of hitting the inflation target since late 2021. The drivers of that non-housing services inflation were largely due to lower rent and insurance costs. By contrast, inflation for goods increased by 1.3% driven by food and electricity inflation.
Prior to the May meeting, the RBA will get one last labour market report as well as the Q1 wage print. These reports are extremely important. As final inputs, they’ll provide important context to the economic landscape and guidance in determining whether we should indeed go through with the rate cut.
The hopeful inflation news is welcome indeed. These economic growth headwinds make it more difficult for the RBA to escape easing monetary policy. The central bank previously anticipated maintaining interest rates until the third quarter of this year, but market expectations have shifted significantly in light of current data. Economists expect the terminal RBA policy rate will hit 3.60% by Q3-2025. This forecast has been lowered from our last forecast of 3.85%.
“Australia’s Q1 CPI was a mixed bag. Headline inflation rose 2.4% y/y, versus our estimate of a 2.2% increase. Trimmed mean CPI, the Reserve Bank of Australia’s preferred measure of underlying inflation, grew 2.9% y/y, in line with our forecast.” – FXStreet
While the RBA might be comfortable, it should be from the clear broad-based easing of price pressures pointed to by their trimmed mean measure. The bank forecast a terminal trimmed mean CPI of 2.7% starting in Q2. This prediction is consistent with its market-implied rate path analysis since February.
As the RBA continues to steer between rocky economic circumstances, market analysts have pared their forecasts for upcoming RBA cuts. There is speculation that another 25 basis points cut could occur in Q4, contingent on international trade dialogues and developments in U.S. tariff policies.
“We therefore lower our terminal RBA policy rate to 3.60% by Q3 (3.85% previously). We do not preclude a cut in Q4, but much hinges on trade talks and whether the US dials back its tariff agenda.” – FXStreet
These meetings and the ensuing accountability reports will be hugely important for the RBA. Second, they will more aggressively consider their monetary policy choices in response to shifting economic signals. We understand this is a time of great uncertainty. This is not to say that external factors would not affect domestic inflation trends and the central bank’s response to them.