The RBA is continuing its promise to cut the official cash rate if inflation looks like it is sustainably making its way back into the Reserve Bank’s preferred target band.
Michele Bullock delivered the second rate cut of 2025 in May, bringing the official cash rate down to 3.85%. The last time it was at 3.85% was in May 2023. It is also the first time since March 2020 that the RBA has cut the cash rate twice in the space of three meetings.
It was widely expected the RBA would cut in May, having kept rates on hold in April following the February cut. There was insufficient data available by April for the Reserve Bank to justify another cut, but key inflation figures released at the end of last month pointed to a continued easing in underlying price pressures.
As always, we aim to provide a clear view of what the RBA is saying, the latest economic data, and how those in power at the big banks are interpreting it.
While the headline news of the cut will be the biggest relief to borrowers, the statement provided even more signs of encouragement.
Toward the end of the statement, Bullock said inflation is expected to remain around target.
“The Board judged that the risks to inflation have become more balanced. Inflation is in the target band and upside risks appear to have diminished as international developments are expected to weigh on the economy.”
Along with the statement came the Statement of Monetary Policy, which the RBA releases four times a year in February, May, August, and November. They updated their forecasts for trimmed mean inflation to be 2.6%, less than the 2.7% in February, as well as expecting slightly weaker GDP growth and a higher unemployment rate peak.
At the press conference at 3.30pm, Michele Bullock said that price increases have slowed, and it is fairly broadly based, which is “very good news.”
“If you ignore the more volatile items in the headline cpi - our forecast sees the underlying pulse of inflation around the midpoint of the 2 to 3% range over the next year or so,” Bullock said.
“The Board’s strategy for quite some time has been to bring inflation down while avoiding a sharp rise in unemployment. This is consistent with our dual mandate of price stability and full employment. I know this period of relatively high interest rates has been and continues to be challenging for many households and businesses but it was essential we brought inflation down, because inflation hurts everyone.
“The strategy that we took to achieve this was different from that to other central banks that took rates much higher than we did. The Board accepted the trade off that leaving the cash rate where it was would bring inflation down more gradually, but without a big increase in unemployment.”
Bullock always says the Reserve Bank’s decision will be based on data. While unemployment is a metric carefully watched by the Board, the main data point they are looking to is inflation, or the Consumer Price Index (CPI). There are two types of inflation: headline inflation, which measures the overall change in consumer prices including all items in the CPI basket; and trimmed mean inflation, which excludes the most extreme price movements to provide a clearer view of underlying inflation trends.
Headline inflation in the March quarter remained steady at 2.4%, while trimmed mean inflation— which the RBA prefers to assess the true direction of inflation—dropped from 3.3% to 2.9%. This was the first time the annual inflation figures had fallen within the RBA's target band of 2–3% since late 2021.
Inflation data is released monthly; however, that doesn’t include volatile items like utilities and holiday travel. While it is a relevant data point to collect on a more timely basis, the Reserve Bank is mainly looking at the quarterly data, which includes every price. The June quarter inflation data isn’t released until the end of July, which might pave the way for further cuts at that time.
In April’s Finder RBA Cash Rate Survey™, 88% of experts predicted the May cut. More than half of experts surveyed, more than half predict cuts in July and August, while three in four expect two or more cuts in the next 12 months.
Shane Oliver, AMP Chief Economist, expected the rate cut.
“Since the last meeting we have seen a further fall in underlying inflation to within the target range and wages growth in line with RBA forecasts adding to confidence inflation is falling sustainably to the midpoint of the target range. At the same time GDP growth looks to be running weaker than expected with flat consumer spending in the March quarter and global trade uncertainty poses a downside risk to the economic outlook.”
Macquarie University Professor of Economics, Jeffrey Sheen, said it’s been reasonably clear for a while that inflation has stabilised within the RBA’s target range. The RBA should immediately return the cash rate from being restrictive to its neutral level. The RBA may need to ease further later this year in the event of a global recession induced by the policy chaos of the White House.”
Prior to the May meeting, ANZ revised its forecast for future rate cuts. While the bank had said a 25 basis point cut in May was more likely than not, it updated its projections, citing “less urgency to ease over the coming months.”
“In the wake of the US tariff announcements on 2 April, we expected 25bp cuts in May, July and August, getting the cash rate to around a neutral level of 3.35%. We now expect 25bp rate cuts in May and August this year, with the final 25bp of easing in Q1 2026. That latter cut comes with a little more uncertainty than the 2025 easings.”
The bank still expects just one more cut to come this year, in August.
Westpac predicts cuts in August and November, which would bring the cash rate to 3.35% by year’s end.
Westpac Chief Economist and former RBA staffer Luci Ellis said, “This is contingent on underlying inflation trends remaining steady and no further downside shocks from abroad. As highlighted in the SMP scenario and in the Governor’s media conference, the Board has scope to cut further to support the economy should that become necessary.”
NAB, rather boldly, predicted a 50 basis point cut in May. NAB Chief Economist Sally Auld said the downward shift in domestic and global growth since the RBA last met in early April meant a restrictive policy stance in Australia was no longer appropriate.
Homeowners will be hoping NAB is outpredicting every other bank and commentator. While the 50bp cut didn’t materialise, NAB still forecasts cuts in July, August, and November, which would take the cash rate down to 3.1% by the end of the year.
Commonwealth Bank, the nation’s largest lender, believes the July meeting is “live” and has added another cut to its forecast. CBA noted, “Our base case has been for the RBA to deliver two further rate cuts this cycle. We now expect these cash rate cuts to occur a little quicker and favour an August and September cut.”
Following the RBA decision, Commonwealth Bank, Westpac, NAB, and ANZ all lowered their home loan rates by 25 basis points per annum, with the new rates coming into effect between May 30 and June 3.
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