RBA slashes cash rate for second time after May board meeting

The Reserve Bank of Australia has delivered much-needed interest rate relief for mortgage-holders, slashing the official cash rate.

Meeting for the second time under its new dual-board structure, the RBA on Tuesday announced it had cut the national cash rate by 25 basis points to 3.85 per cent.

The move, widely anticipated by economists and the money markets, is the second rate cut for the cycle following an earlier reduction in February and a hold in April.

According to Canstar, an owner-occupier with a $600,000 mortgage today and 25 years remaining on their loan could see their monthly repayments fall by a further $91 on the back of Tuesday’s 0.25 basis point rate cut.

The RBA also left the door open for further rate cuts, citing a promising inflation outlook.

“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance,” the Board said in its 2.30pm statement.

“Data on inflation for the March quarter provided further evidence that inflation continues to ease.

“At 2.9 per cent, annual trimmed mean inflation was below 3 per cent for the first time since 2021 and headline inflation, at 2.4 per cent, remained within the target band of 2–3 per cent.

“Staff forecasts released today project that while headline inflation is likely to rise over the coming year to around the top of the band as temporary factors unwind, underlying inflation is now expected to be around the midpoint of the 2–3 per cent range throughout much of the forecast period.”

But the Board also expressed caution and warned “uncertainty” in the world economy had increased in the past three months.

“While recent announcements on tariffs have resulted in a rebound in financial market prices, there is still considerable uncertainty about the final scope of the tariffs and policy responses in other countries,” the statement reads.

“Geopolitical uncertainties also remain pronounced. These developments are expected to have an adverse effect on global economic activity, particularly if households and firms delay expenditure pending greater clarity on the outlook. “This has also contributed to a weaker outlook for growth, employment and inflation in Australia.

“That said, world trade policy is changing rapidly, thereby making the central forecasts subject to considerable uncertainty.”

There are also uncertainties swirling over the domestic economy, the RBA said.

“There are uncertainties about the outlook for domestic economic activity and inflation stemming from both domestic and international developments,” the central bank said.

“While the central projection is for growth in household consumption to continue to increase as real incomes rise, recent data suggest that the pick-up will be a little slower than was expected three months ago.

“There is a risk that any pick-up in consumption is even slower than this, resulting in continued subdued growth in aggregate demand and a sharper deterioration in the labour market than currently expected.”

The Board reiterated its commitment to low and stable inflation remained its “priority”.

Speaking shortly after the decision, Treasurer Jim Chalmers was upbeat, although said the “job was not finished” on helping Australian households.

“We are really pleased to see more help for hard working families with a mortgage,” he said.

“It reflects the substantial and sustained progress we’ve made together on inflation, and it recognises the uncertain global environment.”

Mr Chalmers said Australia had achieved its soft landing, making substantial progression on inflation without having higher unemployment or a substantially slower economy.

“We’ve got the debt down. Interest rates are falling. Growth is recovering in our economy, unemployment is low. All of that is happening at the same time, and those are all very welcome,” he said.

AMP chief economist Shane Oliver called for a cut prior to the RBA meeting, saying policy settings were still tight and economic growth had slowed.

“The RBA will probably have to revise down its growth forecast for the next six months because of the weak consumer spending indications we’ve had so far,” he said.

“There’s still a threat posed by economic growth from tariffs in the US and that threat, while not as high as it was in early April, is still by my calculations five times higher than it was at the end of the year.”

Independent economist Saul Eslake said the May rate cut was almost certain but warned households they might not get as many rate cuts as first expected.

“One rate cut was almost certain, two is likely but after that I am not sure,” he said.

“The argument people are using is Trump will throw the US economy and the world economy into a recession and if that happens we might get four (rate cuts).

“But we don’t know if that is going to happen and the Reserve Bank doesn’t know that with the confidence it would require to cut rates before it sees evidence of it happening.”

Australia's Cash Rate 2022

betashares chief economist David Bassanese said increased uncertainty around US tariff policy had cemented the case for a rate cut on Tuesday and would likely fuel further cuts later in the year.

“The RBA feels (tariffs) will reduce global and local economic activity at the margin, and hence demand-led inflationary pressures,” he said.

“Indeed, the RBA has modestly downgraded the local growth and inflation outlook compared to its forecasts back in February.

 

“But even without recent global market volatility, the RBA was likely to have cut interest rates today simply because local inflation has behaved as desired, falling back into the target band even a little earlier than the RBA expected.”

The decision to move on rates comes amid favourable inflation data, but stronger-than-expected employment figures rocked market expectations of further rate relief.

The bond market priced in an 87 per cent chance of a rate cut to 3.85 per cent prior to the RBA’s move.

This was down from 95 per cent earlier in the month after surprisingly strong job figures, which showed 89,000 Australians found work in April.