Receding inflation risks and a fragile household sector have a 25bps rate cut from the RBA firmly in the frame for today's meeting (decision due 1430 AEST). Markets price a 25bps cut in the cash rate from 3.85% to 3.60% as a near lock, with two further cuts discounted by year-end. After the first two cuts of the easing cycle in February and May were separated by a pause in April, the expectation is that slowing inflation and subdued economic growth has opened the door to back-to-back cuts. However, the labour market remains robust, with solid momentum in employment keeping the unemployment rate low at 4.1%.
The RBA's last rate cut in May was dovish beyond the decision itself and largely set the stage for a follow-up move today. The Board elected to cut by 25bps but the surprise revelation came from Governor Bullock at the post-meeting press conference that a larger 50bps cut had been discussed. The uncertainty around global trade in response to the US Administration's tariff regime was a clear factor, but the meeting minutes would later reveal that the Board concluded that domestic conditions 'could, on their own, justify some degree of reduction in the cash rate'.
New forecasts published by the RBA at the May meeting downgraded the outlook for the Australian economy. Forecast GDP growth (in year-ended terms) was lowered from 2.4% to 2.1% this year and from 2.3% to 2.2% in 2026. Risks to this outlook appear to be to the downside after a soft March quarter where GDP growth came in at just 0.2% quarter-on-quarter and 1.3% year-on-year. For growth to pick up as the RBA expects, the household sector will be key. But consumption growth was tracking at a weak pace (0.4%q/q, 0.7%Y/Y), a clear sign that the RBA will need to continue dialing back policy restriction.
Inflation is not standing in the way of further RBA cuts. In the March quarter, inflation returned to the 2-3% target band on both a headline (2.4%) and core basis (2.9%). This led the RBA to lower its projections, with core inflation now seen tracking nearer to the midpoint of the band at 2.6% across the forecast horizon out to mid 2027. May's reading of the monthly CPI gauge suggests that inflation has continued to cool since the end of the March quarter. Headline inflation was pressing the bottom end of the band slowing from 2.4% to 2.1%yr while core inflation eased from 2.8% to 2.4%yr.
