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RBA cuts rate to 3.85% as inflation eases, signaling readiness for further easing to support the Australian economy amid global uncertainties
On Tuesday, the RBA reduced the cash rate target by 25 basis points to 3.85%, marking the second rate cut this year. This decision reflects the RBA's assessment that inflationary pressures have eased, with both headline and underlying inflation returning to the 2–3% target range. Specifically, headline inflation stood at 2.4% and trimmed mean inflation at 2.9% over the year to the March quarter. RBA Governor Michele Bullock struck a notably dovish tone in her post-meeting remarks, revealing that the Board actively considered a larger, 50-basis point cut, underscoring the RBA’s growing confidence in the disinflation trend and its readiness to support economic momentum.
The RBA noted that while domestic economic indicators, such as steady unemployment rates and firm employment growth, remain positive, the outlook is clouded by global uncertainties. Key concerns include escalating trade tensions, particularly the imposition of new tariffs by the U.S. on Australian goods, and geopolitical conflicts in the Middle East and Eastern Europe. These factors are expected to weigh on Australia's domestic activity and inflation in the forecast period. This resulted in the RBA lowering its forecasts across household spending, business investment and exports.
The board judged that the risks to inflation have become more balanced but emphasised that the outlook remains uncertain, heavily dependent on unpredictable developments in global trade policy. While the current monetary policy remains restrictive, the board indicated openness to further easing if international developments significantly impact the economy. Market expectations have adjusted accordingly, with forecasts suggesting the cash rate could approach 3% by mid-2026.
Bond markets are currently pricing in three additional 25 basis point rate cuts by the RBA’s February 2026 meeting, with a 75% probability that the first cut will occur as early as July. In its downside scenario analysis, the RBA has judged that an escalation in global trade tensions, particularly the trade dispute with the U.S., would likely weigh on economic growth and, in turn, lead to lower inflation. With the cash rate now at 3.85%, the central bank retains ample room to shift toward a more expansionary policy stance to support activity if needed.
The RBA's decision to lower the cash rate aims to support the Australian economy amid global uncertainties, ensuring inflation remains within the target range while sustaining employment growth. The Board’s dovish tone suggests a strong likelihood of further rate cuts in the coming months, particularly as escalating trade tensions continue to weigh on economic activity.
Source: Reserve Bank of Australia, Statement by the Monetary Policy Board: Monetary Policy Decision, 20 May 2025
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