Higher inflation and fiscal risks could limit central bank's easing cycle
Australians can still expect an interest rate cut in May, but the overall pace of monetary easing through 2025 may be slower than previously forecast, according to AMP chief economist Shane Oliver (pictured above).
Speaking weeks ahead of the Reserve Bank of Australia’s (RBA) next meeting, Oliver said a 25-basis point cut remains likely, with further reductions in August and potentially November. However, he suggested the central bank may limit moves to just three cuts this year.
Oliver’s comments follow a shift in sentiment from earlier this year, when speculation swirled around the possibility of an emergency rate cut and as many as five reductions by December. The trigger at the time was US President Donald Trump’s sweeping tariff proposals, which have since been partially delayed, excluding China.
“Markets often overreact, if you go back a few weeks, some were talking about an emergency meeting to make a 50-basis point cut,” he said. “You could argue that was over the top.”
Wednesday’s trimmed mean inflation data showed a 0.7% quarterly increase — slightly above market expectations. Oliver said the figure was not dramatically high but enough to temper expectations of aggressive rate relief.
“The numbers weren’t bad, but weren’t as good as some were hoping,” he said. “It was only 0.1 per cent higher, which you could argue is neither here nor there, but at the margins it has affected expectations on how much and how quickly the RBA will cut.”
Commonwealth Bank economist Gareth Aird echoed that view, suggesting that while a May cut is still likely, the higher-than-expected inflation number introduces some risk of delay.
“The inflation data is essentially in line with the RBA’s forecasts and therefore the board will consider the prices side of the economy evolving in line with its expectations,” Aird said, adding that despite the CBA downgrading its global outlook, the bank still anticipates a cut this month.
If a 25-basis point cut goes ahead, Canstar analysis shows it could reduce monthly repayments by around $91 on a $600,000 mortgage with 25 years remaining.
All four of Australia’s major banks expect the Reserve Bank to lower rates on May 20, though they are split on how deep the cut will be. NAB is forecasting a 50-basis point reduction, while the other big banks anticipate a more modest 25-basis point move.
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