But cut not a 'shoo-in', bank warns
Westpac has revised its forecast for the Reserve Bank of Australia (RBA)’s next interest rate cut, now expecting a July move rather than August, citing a sharper-than-expected drop in inflation per the latest Consumer Price Index (CPI) data.
“We now expect the next RBA rate cut to be in July rather than August, but this is not the shoo-in the market seems to think it is,” Westpac's chief economist Luci Ellis said in a research note. “The RBA has sometimes defied market pricing if offshore risks are being over-weighted, but now is the time to bring forward a move it knows it will likely make soon anyway.”
Australia’s CPI rose by 2.1% in May 2025, down from 2.4% in the previous three months and well below the expected 2.3%. This marks the lowest inflation rate since October 2024 and keeps the reading within the RBA’s 2–3% target range.
Notably, food and non-alcoholic beverage prices slowed to 2.9% (from 3.1% in April), with fruit and vegetable inflation decelerating sharply. Housing and recreation inflation also moderated, while some categories such as alcohol, tobacco, and clothing saw slight increases.
Ellis said: “The May monthly CPI indicator came in below even the low number that we expected. That helps bring forward inflation’s return to the 2.5% target midpoint and keep it there, which is what the RBA is trying to achieve.
“The detail around housing and market services was also a promising sign that core inflation is seeing a sustained moderation. But the June quarterly inflation numbers are still likely to print on the high side, so some caution on the inflation outlook is likely and warranted.”
Despite the improved inflation outlook, Ellis cautioned that the RBA is likely to maintain a cautious tone. “The RBA’s outlook is still shaped by concerns about the tight labour market, slow economy-wide productivity growth and the pricing implications of recovering demand. Thus we expect non-committal, even grudging, language in the post-meeting communication."
The bank continues to expect a terminal rate of 2.85% by way of three further cuts after the upcoming one.
