Policy easing likely as inflation subsides despite global risks
The Reserve Bank of Australia (RBA) should be shifting its policy focus from inflation to economic growth and employment as inflationary pressures ease, according to a bank economist.
Australia’s underlying inflation, as measured by the trimmed mean, dropped to 2.9% in the March quarter, providing the RBA with more room to adjust its stance. This development comes amid a subdued global outlook and weaker growth forecasts, which are limiting further inflation risks.
“Fortunately, unlike the US which faces stagflation due to its tariffs, our inflation outlook appears much more benign than previously forecast,” said David Robertson (pictured above), chief economist at Bendigo Bank, who added that inflation is likely to stabilise between 2.5% and 2.75%, prompting the central bank to recalibrate its priorities.
“The RBA has been dealing with global inflation shock for three years, but its concerns are quickly moving from price stability and inflation to protecting growth and jobs.”
The RBA is expected to lower the cash rate in May, though uncertainty remains over the size of the move. Robertson anticipates four rate reductions this year, including one in May, bringing the cash rate down to around 3.1% by year-end.
“The next cut is almost certain for May 20, but of what magnitude?” he said. “Meanwhile, the markets are now factoring in five rate cuts to around a 2.8% level by year end. It’s a deeper path than previously expected.”
While a more aggressive cut is unlikely, Robertson suggested a 35-basis point reduction could help align the rate with more convenient levels.
International financial markets continue to face instability, despite recent tariff deferrals by the US government. Equity markets have recovered some ground, but ongoing tensions between the US and China are clouding the outlook.
“Tariffs are generally bad for everyone but especially problematic for the country imposing them,” Robertson said. “So, with the escalation between the US and China – the world’s two largest economies – it’s a question of just how much slower these economies will be growing this year and next.”
The IMF now expects US economic growth to fall to 1.8% this year, while China’s forecast has been cut to 4%. Australia is also feeling the impact, with its expected growth rate for 2025 lowered from 2.1% to 1.6%.
Despite the external headwinds and political uncertainty in the lead-up to the federal election, Australia is relatively well placed compared to other economies, according to Robertson.
“Australia’s lower exposure to tariffs than our peers, and lower interest rates ahead, should see a rebound in consumer sentiment later in the year, with outperformance in our region,” he said, adding that while volatility is likely to persist, key trading partners could prove more resilient than others around the world.
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