By Harry Ottley, Economist at CBA:
- The RBA cut the cash rate by 25bp to 3.85% as expected this week. The tone was more dovish than both we and the market had anticipated.
- We retain our call for two further interest rate cuts this year but expect the cuts to come marginally more quickly.
- Next week, the flow ramps up ahead of the Q1 2025 national accounts, with partials on business investment and construction in focus. Other local releases include the monthly CPI, retail trade, building approvals and credit.
- Offshore, the RBNZ will meet, with a rate cut widely expected. In the US, the PCE deflator and FOMC minutes will be closely watched.
The RBA Monetary Policy Board lowered the cash rate target by 25bp to 3.85% last week, as was widely expected. The tone of the post-meeting communication was a dovish tilt.
The statement noted that “the risks to inflation have become more balanced” and that “underlying inflation is expected to be around the midpoint of the target throughout much of the forecast period”.
At the media conference, RBA Governor Michele Bullock expressed high conviction that a 25bp cut was the appropriate move. She noted that an on-hold decision was discussed but quickly dismissed. A larger 50bp cut was also considered, but lacked a compelling case.
The implication that a 50bp cut was considered more closely than an on-hold decision was the main surprise for us.
Some of the RBA’s increased confidence that inflation risks have eased stems from offshore developments. The global trade disruptions emanating from the US have been assessed as disinflationary overall—primarily due to weaker global growth and elevated uncertainty weighing on Australia’s growth outlook. Domestic data on household consumption has also been soft so far in 2025. Weaker expected growth domestically implies a softer labour market and reduced inflationary pressure.
The updated economic forecasts in the May Statement on Monetary Policy included broad-based downgrades, reflecting the Bank’s evolving assessment of the outlook. However, the size of the revisions was modest, as the lower cash rate assumption absorbed some of the impact of the weaker growth picture.
Overall, the post-meeting communication showed more conviction than expected that inflation risks have eased. Money markets have responded by pricing in additional and more aggressive easing.
We maintain our call for 50bp of further cuts this year, but we now expect the RBA to move policy closer to neutral marginally more quickly. We now expect 25bp cuts in August (unchanged) and September (moved forward from November). July’s meeting is ‘live’, but will depend on the data flow between now and the next meeting.
There is also a risk of an additional cut this year—bringing the cash rate target to 3.10%—but the timing and likelihood will depend on incoming data and offshore developments.
This week, focus shifts to local economic data. The April Monthly CPI will garner most attention. We expect inflation eased to 2.3%/yr. Partials for the Q1 2025 national accounts will also begin to roll in.
First is the construction work done on Wednesday. The volume of work has been steadily rising, led by engineering construction, and we expect this trend to continue. We have pencilled in a 0.4% increase in total work done.
Retail trade data will also be in focus, as the RBA cited weaker-than-expected household consumption as a factor of its downgraded growth forecast. We expect April retail spending to be solid, rising 0.5%/mth due to some strength in our internal spending data.
Building approvals and private sector credit will also be released.
Capex data is due Thursday. We expect actual capex to rise by 0.5% in the quarter. Perhaps more telling will be whether capex intentions for the current (sixth estimate) and next financial year (second estimate) have shifted amid elevated global economic uncertainty. The survey is conducted over the 8–9 week period following the start of the quarter (e.g. March quarter returns are completed in April and May). We see a clear risk of downgrades to intentions, as the survey coincides with recent spikes in uncertainty.
Across the Tasman, the RBNZ is expected to cut rates by 25bp. Our colleagues at ASB note significant uncertainty around the OCR’s path this year, but their base case forecasts a 2.75% year-end rate.
Offshore, the dataflow is light, but markets will focus on the PCE deflator and FOMC minutes in the US.
