Central bank weighed 50bp move but opted for steady path; signals flexibility if global conditions worsen
The Reserve Bank of Australia (RBA) cut the cash rate by 25 basis points to 3.85% at its 20 May meeting, citing weakening household consumption, easing inflation, and growing uncertainty over global trade policy. Minutes released on Tuesday show the board also considered a larger 50bp cut, but ultimately preferred a “cautious and predictable” approach given the evolving risks.
The minutes offer the clearest picture yet of the RBA’s balancing act—acknowledging progress on inflation and domestic conditions that justified some easing, while also grappling with an increasingly volatile global environment fuelled by escalating US tariffs and potential retaliatory measures.
Domestic conditions justified a cut
Underlying inflation, as measured by the trimmed mean, had returned to the RBA’s 2–3% target band for the first time since 2021, and sat at the midpoint on a six-month annualised basis. While headline CPI remained at 2.4% in the March quarter, the board “welcomed” the broad-based moderation in services and construction costs.
Employment growth remained solid, with the unemployment rate holding around 4.1% and the underemployment rate edging lower. However, consumption growth appeared weaker than expected, constrained by earlier declines in real disposable income and elevated mortgage repayments, despite February’s rate cut.
The RBA’s staff forecasts, revised downward, suggested that GDP growth would pick up more slowly than previously anticipated, while underlying inflation would remain near the midpoint of the target band. These projections were based on a technical assumption that included a rate cut in May.
Global trade uncertainty tipped the balance
While domestic conditions alone supported a modest easing, it was the deteriorating global outlook that strengthened the case. Members expressed concern over the unexpectedly large and unpredictable tariffs announced by the US in April—moves that had briefly roiled markets and prompted retaliation from China.
Although equity and bond markets had largely stabilised by mid-May, the board voiced scepticism about the rebound, noting it may rely too heavily on hopes for policy stimulus or deregulation, particularly in the US. The minutes highlighted that the US dollar’s depreciation following the tariffs ran counter to typical expectations and may reflect a reallocation of global capital away from US assets.
China, by contrast, was seen as well placed to weather the turmoil, with members noting Beijing’s commitment to its 5% growth target and capacity to deliver further stimulus.
Members agreed that global developments were more likely to depress inflation in Australia—via weaker global demand and lower tradable goods prices—than to raise it through supply chain disruption. Nevertheless, they acknowledged the situation remained fluid and could evolve quickly.
Why not 50 basis points?
Despite considering a 50bp move, the board opted for a more measured 25bp cut, judging it better aligned with the baseline outlook and market expectations.
While acknowledging downside risks—such as a sharper global downturn or a further pullback in household consumption—the board saw no immediate evidence of significant deterioration in Australian economic activity. Members also cited the risk of sending an overly strong easing signal in an uncertain environment and noted that a larger move could prove difficult to unwind if conditions shifted.
Instead, the 25bp cut was seen as preserving policy flexibility while responding to both domestic softness and external risks. “It would ensure that monetary policy settings remained predictable at a time of heightened uncertainty,” the minutes noted, while also emphasising that the board was “well placed to respond decisively” should international developments materially affect the outlook.
Forward guidance: measured, not passive
Despite the rate cut, the RBA signalled it is not in a rush to ease further. The board stated it was “not yet time to move monetary policy to an expansionary stance,” and reiterated that future decisions would depend on incoming data and the evolving assessment of risks.
Analysts took this as a sign that the bank is likely to pause at its July meeting, with August the earliest plausible window for a follow-up cut. Westpac’s Chief Economist Luci Ellis described the minutes as reinforcing the view that the RBA is now in a “normalisation phase” rather than a full-blown easing cycle.
Financial markets, however, are pricing in a roughly 70–80% chance of another 25bp cut in July, amid persistent global headwinds and ongoing weakness in domestic indicators such as retail sales and business investment.
Housing implications and wage signals
Falling borrowing costs have already begun fuelling house price growth across major cities, with prices rising 1.7% since the RBA’s first cut in February. Auction activity has surged, with nearly 3,000 homes going under the hammer in late May and clearance rates hitting year-long highs.
While rising property prices may complicate the RBA’s path, Governor Michele Bullock has suggested housing affordability is largely a supply-side issue—placing the responsibility on federal and state governments to address shortages.
Meanwhile, wage growth remains moderate. The Fair Work Commission’s 3.5% increase to minimum and award wages, announced on 3 June, is broadly in line with the RBA’s 3.3% forecast for overall wage growth by year-end. The board also flagged the possibility that workers’ growing preference for job security could dampen future wage pressure.
