May interest rates cut: RBA delivers relief but stays cautious amid global tariff uncertainty

[Pelican Press 0]

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May interest rates cut: RBA delivers relief but stays cautious amid global tariff uncertainty

A 0.25 per cent rate cut to ease the nerves, but the RBA is keeping its powder dry to ensure it can give the economy a boost if the world starts to unravel due to tariff uncertainty.

The softly, softly approach that has been a hallmark of Michele Bullock’s Governorship continues, with the Bank determining that inflation is well within the band to take the foot off the brake but global uncertainty will prevent it from making any bold moves.

The Bank was looking at two key factors in making its call.

First, the domestic experience.

Despite growth bumping along at just 1.6 per cent annualised, the Reserve Bank sees an economy that is only slowly getting off the canvas. While demand is slowly rising, thanks to a lift in household incomes, businesses are still not seeing a return to decent growth. Holding it back is a tight labour market meaning companies are struggling to get output up.

The Reserve Bank also delivered something of a coded warning to Treasurer Jim Chalmers.

Productivity is a problem, and that means that wage growth is unsustainable, and will not only hurt business profits but potentially drive up inflation in the process. For now, weakness in some parts of the economy make it hard for businesses to pass price rises through.

The other big issue that vexed the Board was what Donald Trump’s tariff tango with China was going to do the *********** economy. With 8 per cent of Australia’s gross domestic product reliant on ******** demand for iron ore and coal, a hit to China could drag us down with it.

The Bank believes “geopolitical uncertainties remain pronounced” and has downgraded its forecasts of GDP growth from 2.4 per cent by December this year to 2.1 per cent. Australia’s growth rate is now forecast to be lower originally expected through to June 2027.

The Board is well aware that things could get much worse in the global economy and “considered a severe downside scenario” that would see it “respond decisively to international developments”. In other words, the Bank wants to keep its powder dry.

The upside of the downside of geopolitical turmoil is that lower growth has also pushed down inflation expectations, continuing the downward trajectory into the Reserve Bank’s target range of between 2 and 3 per cent for both headline and underlying inflation (which strips out volatile movements).

“With inflation expected to remain around target, the Board therefore judged that an easing in monetary policy at this meeting was appropriate,” the Bank said.

Future rate cuts still on the cards

In passing down its assessment of where the economy is at, the RBA has described monetary policy as “somewhat less restrictive”, which means it is yet to return to the neutral rate where it is neither stimulatory or restrictive.

That is a good sign for those looking for further rate relief.

The forward assumptions about rates (which the RBA takes from the markets, rather than its own forecast) is also lower.

Last meeting, the RBA had rates settling at 3.5 per cent, in its statement today, that is now 3.2 per cent.

The major banks have already passed on the cuts in full, safe in the knowledge there are more cuts to come.

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