Quarterly CPI analysis: May cash rate cut expected
Quarterly CPI analysis: May cash rate cut expected
Australia’s CPI is continuing its downward trajectory, with headline inflation remaining at 2.4 per cent and underlying inflation dropping below 3.0 per cent for the first time since COVID-19.
Though this historical data looks at the first three months of 2025, before the tariff war, it alone provides sufficient evidence for the RBA to cut the cash rate by 25 basis points in their May board meeting.
The Treasury’s pre-election economic outlook suggests that the tariff war might reduce Gross Domestic Product (GDP) by 0.1 percentage points in the next year and increase inflation by 0.2 percentage points. However, this estimate excluded the impacts of broader market uncertainties. More recently, the International Monetary Fund (IMF) has downgraded Australia’s growth forecast for 2025 from 2.1 per cent to 1.6 per cent. This contrast in expectations highlights the risks posed by uncertainty in the global market, beyond the direct impacts of the tariffs.
A reduced forecast for economic growth has implications for domestic inflation and the RBA’s next cash rate decision. Slower growth would take some heat out of the economy, reducing inflation, and prompting the RBA to be more resolute about reducing the cash rate in May.
Services inflation, which relies heavily on labour, has reduced to the lowest annual increase since the June 2022 quarter. Meanwhile, Australia’s labour market continues to maintain its strength without giving rise to the wage-induced inflation that some have feared. This reduces the near-term unemployment risk that the RBA faces by keeping the cash rate at a restrictive level, reducing the urgency with which to cut.
Despite this, the case to cut is stronger. I expect the RBA to cut the cash rate by 25 basis points in May and continue cutting through the year.
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