A significant interest rate reduction by the Reserve Bank of Australia (RBA) is on the horizon, with market expectations suggesting a potential cut of up to 50 basis points. Diana Mousina, AMP’s deputy chief economist, indicated in a recent research note that a reduction from the current cash rate of 4.10% to 3.85% is likely at the RBA’s upcoming meeting on May 20.
Factors influencing this decision include the ongoing trade tensions, particularly if US tariffs are extended under Donald Trump’s administration. In such a scenario, a more substantial cut to 3.60% might occur, with additional rate relief projected later in the year.
Mousina forecasts another 25 basis point reduction in both May and August, estimating that the cash rate will end 2025 at 3.6% and fall further to 3.1% by 2026, based on anticipated economic conditions. However, should the impacts of US tariffs on Australia’s growth and financial markets be more damaging than expected, the RBA may adopt a more aggressive cutting strategy, potentially delivering four more cuts in 2023, including the possibility of a 50 basis point cut at the May meeting as a preventative measure against recession risks.
Despite the RBA’s recent discussions not addressing a cut during its last rate hold, financial markets are expecting at least a 0.25 percentage point reduction, with an 82% likelihood of a more substantial cut. Analysts are concerned that increasing trade tensions and stock market volatility may compel the RBA to ease monetary policy further to stimulate the Australian economy and steer clear of a financial downturn.
Mousina noted that slower global trade growth could negatively affect Australian exports to non-US markets, thereby potentially impacting GDP growth. The RBA’s response may become more aggressive if signs of a recession or financial market instability manifest, although specific conditions triggering this scenario have yet to fully arise, though they are becoming increasingly probable, prompting markets to adjust their expectations accordingly.