Cautious moves: The Reserve Bank of Australia building in Sydney. Financial markets are pricing in a 70% chance the central bank will cut rates again next month. — AP
Sydney: Australia’s central bank discussed the case to cut interest rates by an outsized half-percentage point last month, highlighting that a larger reduction would provide greater insurance for the economy against any major US-led trade upheaval.
The Reserve Bank of Australia (RBA) ultimately decided to lower borrowing costs by a quarter-point, as widely anticipated, in part to ensure that “monetary policy settings remained predictable at a time of heightened uncertainty,” according to minutes of the May 19 and 20 meeting released on yesterday.
The case to ease by 25 basis points to bring the cash rate to 3.85% was the “stronger one”, the board concluded.
“Developments in the domestic economy on their own justified a reduction,” the minutes showed. “The case for that action was strengthened by developments in global trade policy.”
Shortly after the release, RBA assistant governor Sarah Hunter said global trade uncertainty will likely weigh on Australia’s economy and hiring, adding tradable goods prices will be “slightly dampened” too.
Her remarks together with the board’s discussion underscore the RBA’s switch of focus to economic risks arising from the Trump administration’s tariff regime following a three-year campaign to rein in inflation.
“A July rate cut is ‘live’,” said Belinda Allen, an economist at Commonwealth Bank of Australia. “We expect it will come down to the data flow.”
Financial markets are pricing a 70% chance of a rate cut next month.
The minutes showed that there was an “absence of signs” in domestic data that US President Donald Trump’s tariff policy was a having a “significant negative impact” yet, even though it had “adversely changed the outlook for growth” in Australia’s major trading partners.
As a result, members concluded that “it was not time to move monetary policy to an expansionary stance, taking account of the range of estimates involved, given that inflation was yet to return sustainably to the midpoint of the target range and the staff’s assessment that the labour market was still tight”.
Still, the rate-setting board is ready to move if needed, with the minutes showing that “policy was well placed to respond decisively” to global developments if they were to have “material implications” for activity and inflation.
Prior to the May decision, data showed core consumer prices returned to the RBA’s 2% to 3% target for the first time in more than three years in the March quarter.
The central bank’s latest forecasts show underlying inflation will ease further to be around the 2.5% target mid-point throughout much of the forecast period with the labour market loosening a tad.
Official figures released alongside the minutes yesterday showed exports likely detracted from economic growth in the first three months of this year, confounding forecasts for a flat outcome while public demand was a drag too.
That adds to soft retail and capital investment figures recently, suggesting Australia’s economy entered the global tariff uncertainty on a shaky footing.
Economists forecast today’s data will show quarterly gross domestic product (GDP) growth of 0.4%, slower than the December quarter’s 0.6% pace.
The RBA fears growth could slow further in the event of a “trade war”.
The partial data “erred weak”, said Su-Lin Ong, chief economist for Australia at Royal Bank of Canada after downgrading her GDP growth estimate to 0.3%, from 0.4%. “The RBA’s easing bias will be reinforced by underwhelming growth in early this year with the composition poor.”
The RBA’s dovish stance contrasts with the US Federal Reserve (Fed) which has kept rates unchanged this year, citing a strong economy and uncertainty over policy changes like tariffs.
Fed officials will next meet on June 17 and 18, when they’re widely expected to hold rates steady again. — Bloomberg
