RBA holds cash rate steady as commentators pencil in a May rate cut
The RBA held interest rates steady at 4.1 per cent on Tuesday amid domestic and international uncertainty.
While inflation has eased in line with the Reserve Bank of Australia (RBA)’s forecasts, the board said it would need further confirmation that inflation will reach the 2.5 per cent target band before lowering interest rates further.
The Reserve Bank noted that Australia’s current monetary policy settings are well placed to respond to international developments, which have caused significant uncertainty in recent months.
“The RBA’s decision to hold the cash rate this week was rooted in the uncertainties posed by the impacts of the first cash rate cut, an impending Australian election and a politically turbulent world,” Anders Magnusson, partner at BDO Economics, said.
In a statement, the RBA said: “Recent announcements from the United States on tariffs are having an impact on confidence globally and this would likely be amplified if the scope of tariffs widens, or other countries take retaliatory measures.
“Geopolitical uncertainties are also pronounced. These developments are expected to have an adverse effect on global activity, particularly if households and firms delay expenditures pending greater clarity on the outlook.”
Economists have predicted that the RBA would have more confidence to cut interest rates in May, following the release of quarterly CPI data on 30 April. Core inflation has remained relatively stable over the past few months, sitting at 2.7 per cent in the 12 months to February.
Gareth Aird, economist at Commonwealth Bank, said if quarterly underlying inflation was below the RBA’s forecast of 0.7 per cent, a 25 basis point rate cut in May was a “done deal.”
Westpac economists predicted that the RBA would cut interest rates three more times throughout 2025, which would see the cash rate fall to 3.35 per cent.
Commentators are keeping an eye out for impacts from the US trade war, although experts have said that the direct effects on the Australian economy are likely to be contained.
“The downside risks to global growth from the US-instigated trade war are also a concern, though Treasury modelling in yesterday’s Budget suggests the implications for the Australian economy are modest,” Lucy Ellis, chief economist of Westpac Group, wrote in an update.
The Trump administration has already levied tariffs on steel and aluminium, which economists predicted would have limited direct impacts on Australia’s economy.
However, experts have worried that reciprocal US tariffs, set to be announced on 2 April (AEDT), could hit Australia’s beef and pharmaceutical industries. The United States Trade Representative’s 2025 National Trade Estimate Report singled out trade barriers related to animal products and pharmaceutical patents in Australia.
Australia’s domestic conditions have been more optimistic as private demand has recovered and financial stress has eased, although languishing productivity has led to growing unit labour costs.
The tight domestic labour market has remained on the RBA’s radar as a potential inflation risk. The upcoming election, set to be held on 3 May, has introduced additional uncertainty to the domestic picture.
“While both parties are promising to fund spending through increased debt, budget analysis of Government policies forecasts a notable decrease in public spending over the next two years. The RBA will need to consider how likely a reduction is and its effect on inflation,” Magnusson said.
Pradeep Philip, head of Deloitte Access Economics, said: “As well as avoiding the awkward optics of a pre-election rate cut, the RBA’s new monetary policy board will want the space to consider how any pending pre-election commitments may influence the inflationary outlook.”
The Reserve Bank’s decision to hold rates in April was largely expected, given global and domestic uncertainties and the central bank's hawkish messaging.
“The RBA has taken a cautious approach by holding the cash rate and waiting for the March quarter CPI release and the results of the upcoming election,” Magnusson said.
“In the meantime, it will be better understanding the growing uncertainties from the Trump administration, international conflict and extreme climate events.”
