The Reserve Bank of Australia (RBA) is expected to lower the cash rate from 4.1% to 3.85% at today's meeting (due 1430 AEST), delivering its second 25bps cut of the easing cycle. Although the decision is likely to be more finely balanced than the 'lock' implied by market pricing, inflationary progress and a labour market that has rebalanced from peak tightness should pave the way for a cut today. Pricing for a further two cuts by year-end to 3.35% will be assessed against the RBA's updated economic forecasts and the tone of Governor Bullock's post-meeting press conference.
After commencing its easing cycle with a 25bps cut in February, the RBA is set to deliver a follow-up cut today. Labour market strength and uncertainty around the outlook shape as the main risks to a cut. But recent progress on the inflation side of the Board's mandate, notably core inflation at 2.9% returning to the 2-3% target band for the first time since 2021, will likely be given more weight, guiding the decision towards a cut.
At the February meeting, the Board noted that the incoming data had increased its confidence that inflation was on track to return to target. It therefore decided to cut, framing the decision as reversing the final or 'insurance' hike of the tightening cycle from November 2023 when upside risks to inflation were the concern. In lowering the cash rate to 4.1% in February, the Board judged that monetary policy remained at a restrictive level. If the Board does cut today, expect it to communicate the move as aligning with this broader strategy of gradually dialling back the tightness of monetary policy.
New forecasts in the May Statement on Monetary Policy will accompany today's decision. As has been the case for its central bank peers, uncertainty will be the overarching theme for the RBA. The worst-case scenario in the tariff war looks to have been averted with the US and China now in a 90-day truce of significantly lower tariffs; however, there is still a lot of water to go under the bridge, and the impacts on growth and inflation across the globe from the tariff announcements by the US administration remain unclear.
In that situation, the RBA's forecasts may well see little change in this update. The central scenario in February was for moderate economic growth in 2025 (2.4%) and 2026 (2.3%), though the risks this year may now be skewed a little to the downside. The Board's increased confidence in the inflation outlook should have been given a further boost by headline (2.4%) and core inflation (2.9%) returning to the target band in Q1. Additionally, risks to inflation from the labour market have eased. Unemployment is in the low 4s but tracking in line with the RBA's forecasts, while wages growth - despite firming to 3.4% in Q1 - is well off cycle highs.