Borrowers and equity markets expect consecutive interest rate cuts from the Reserve Bank of Australia (RBA), following a sharp decline in inflation and mounting evidence of a softening economy.
Australia’s monthly Consumer Price Index (CPI) for May showed inflation eased to 2.1% year-on-year, down from 2.4% in April and below the 2.3% forecast. This represents the smallest annual increase since October 2024, placing headline inflation squarely within the RBA’s 2–3% target band. The trimmed mean, the RBA’s preferred measure of underlying inflation, also declined to 2.4% from 2.8%.
Financial markets reacted swiftly, with overnight index swaps pricing in a 96% probability of a standard rate cut at the RBA’s July meeting, up from 84% prior to the data release. Until now, expectations had centred on a rate cut in the December quarter.
“We expect the RBA to cut the cash rate in both July and August, which would see the cash rate sit at 3.35%,” Commonwealth Bank of Australia senior economist Belinda Allen said.
Economists highlight broad-based disinflation
Allen noted a consistent trend in economic data likely to reassure the RBA, including weaker March quarter GDP, deteriorating May business conditions and a stable 4.1% unemployment rate over the past five months.
“While the jobs market has remained resilient, GDP growth in Q1 was sluggish, and today’s data points to further disinflation,” said HSBC chief economist Paul Bloxham. “The global backdrop also continues to pose significant risks.... We expect a total of 75 basis points of easing, taking the cash rate down to 3.1 per cent by Q1 2026.”
More cuts added to forecasts
RBC Capital Markets chief economist Su-Lin Ong added a July rate cut to her earlier forecasts of cuts in August and November. “The breadth of moderation in today’s May CPI... is likely to give the RBA more confidence that inflation is now sustainably within target and moving to mid-point,” she said.
Deutsche Bank’s Phil Odonaghoe also expects cuts in July, August and September, citing “universally softer” domestic data since the RBA’s May meeting. He added that while global risks persist, they do not override the “compelling domestic case for easier policy.”
Signs of easing in services inflation
National Australia Bank head of market economics Tapas Strickland highlighted a three-year low in services inflation, which fell to 3.3% in May. However, he urged caution, noting that a sharp drop in holiday travel prices was influenced by seasonal factors related to Easter and ANZAC Day. NAB is forecasting cuts in July, August and November.
Indeed APAC economist Callam Pickering said the central bank can “cut with confidence” next month. “The RBA will need to cut rates at least another couple of times this year to provide sufficient support to households and businesses, while ensuring that the unemployment rate remains low and we avoid recession,” he said.
AMP economist My Bui also supports back-to-back cuts. “Both our headline and trimmed mean inflation readings are now on the low end versus peers, who have largely cut rates by more than 50 basis points in this cycle,” she said. Bui noted that less than one-third of CPI categories recorded annual growth above 3%, with half showing momentum below 2%.
Outlook in step with global trend
If implemented, a 3.6% cash rate would bring Australia in line with other advanced economies already easing monetary policy.
The RBA has already cut rates twice since February, with the cash rate currently at 3.85%.