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Australia: 25bp Rate Cut To 3.85% (Consensus 3.85%) in May-25

• The RBA cut the cash rate by 25bps to 3.85%, in line with expectations, as trimmed mean inflation fell below 3% and is likely to remain near the midpoint of the 2–3% target range.
• Despite easing financial conditions and recovering household incomes, consumption momentum remains weak, while high unit labour costs, driven by subdued productivity, present lingering inflation risks.
• Global trade uncertainty and geopolitical tensions weigh heavily on the outlook, reinforcing the RBA’s cautious approach and commitment to respond decisively if downside risks to growth or inflation emerge.

Australia: Policy Rate Held At 4.1% (Consensus 4.1%) in Apr-25

• The RBA held the cash rate at 4.10%, in line with expectations, citing ongoing but uncertain progress in reducing underlying inflation towards the 2–3% target range.
• Labour market conditions remain tight despite a February employment decline, with low underutilisation and elevated unit labour costs continuing to present inflationary risks.
• Global uncertainties, including new US tariffs and geopolitical tensions, could dampen global activity and further complicate the inflation outlook, reinforcing the RBA’s cautious and data-dependent stance.

Australia: 25bp Rate Cut to 4.1% (Consensus 4.1%) in Feb-25

• The RBA lowered the cash rate to 4.1% as inflation moderates faster than expected, with underlying inflation at 3.2% in the December quarter, supported by easing wage pressures and subdued private demand.
• Labour market tightness persists despite overall economic weakness, with the unemployment rate at 4%, sustained employment growth, and high unit labour costs posing potential inflationary risks.
• The outlook remains uncertain, with global risks including US trade tensions and geopolitical instability, while further rate cuts will depend on continued disinflation and stable labour market conditions.

Neutral Rates Are Shifting Sands

• Central banks provide vague and evolving estimates of neutral rates that are unreliable guides to policy decisions, although these estimates inform the perceived terminal rate.
• Resilient labour markets and persistent unit labour cost growth challenge the dovish view that policy rates are well above their neutral settings, urging caution.
• Neutral estimates gradually drift to explain the prevailing regime, which doesn’t prevent a pause in cuts or a return to rate hikes consistent with historical norms.

By Philip Rush