A dovish tone to the RBA's decision to lower the cash rate by 25bps to 3.85% has pushed market pricing for further easing by year-end from 2 cuts going into today's meeting towards a third cut. Today's cut makes the cash rate 'somewhat less restrictive' according to the Board, a follow-up move from the first cut of the easing cycle in February. But with updated forecasts showing the recent return of inflation to the 2-3% target band is expected to be sustained, risks associated with the tariff war have prompted a more supportive stance from the RBA. The main surprise from Governor Bullock's post-meeting press conference was that the Board discussed a larger 50bps cut but unanimously settled on the expected 25bps move.
Today's dovish cut is in contrast with the hawkish messaging that accompanied the February cut as the Board started to lower the cash rate from its cycle peak of 4.35%. Back then, Governor Bullock actively pushed back on market pricing for a year-end cash rate at 3.6%. It was a very different message today; inflation risks have diminished; cautious households have not been spending as expected with real incomes picking up; and risks from offshore have elevated due to global trade being upended by tariffs. To underline that last point, mentions of 'uncertainty' in the latest Statement on Monetary Policy increased by more than 140% on February's edition.
Regarding global trade, Governor Bullock said the RBA sees the tariff war as posing disinflationary risks. Amid the backdrop of tariffs reducing trade and weakening demand, the domestic growth outlook in the RBA's updated forecasts was revised down to 2.1% this year (from 2.4%) and 2.2% next year (from 2.3%). As a result, the unemployment rate forecasts were nudged up to 4.3% from 4.2% in both years. Importantly, confidence in the inflation outlook has risen since the easing cycle commenced. The latest view is that inflation (both on a headline and core basis) will hold in the target band across the projection horizon out to mid 2027. These forecasts are predicated on the market curve for RBA rates ahead of today's meeting.
Aside from the baseline outlook, the decision statement noted that the Board considered a scenario with more severe effects on the Australian economy from the tariff fallout. The placement of that detail was to point out that the RBA has the policy firepower to respond. Going forward the statement reiterated the Board retains a data dependent stance and it will be continually assessing the risks to growth and inflation. The next RBA monetary policy meeting is on 7-8 July.