Summary
RBA holds rate at 4.10% amidst heightened global uncertainty
Given the cautious sentiment recently expressed from the RBA, market expectations had been largely aligned for the RBA to leave rates on hold amidst a volatile market backdrop.
While recent softer data points have been encouraging for the RBA’s expectations of inflation returning to target, the gap until the next quarterly CPI print provided the space for a ‘data dependent’ RBA to take pause at this meeting.
Current geopolitical instability presents substantial risk of the RBA being forced into a reversal if they cut rates too quickly, while the federal election announced for early May provides another reason to be cautious.
The statement by the newly formed Reserve Bank of Australia Monetary Policy Board emphasised that inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance.
The Board noted that labour market conditions remain tight, as a range of indicators suggest. Wage pressures have eased but productivity growth has not picked up and labour costs remain high. With monetary policy remaining restrictive, the Board reiterated their highest priority of sustainably returning inflation to target within a reasonable timeframe.
The April Statement noted that monetary policy is ‘well placed to respond’ to international developments if they were to have material implications for Australian activity and inflation.
Our take
The tail risks in global markets have increased markedly in the intervening six weeks since the February board meeting. Trade policy uncertainty is heightened to say the least, with the latest barrage of tariffs expected from the Trump Administration tomorrow on ‘Liberation Day’. As a relatively open, trade-oriented economy, Australia remains particularly exposed to the direct and indirect risks of upending the world trade order.
Central banks should have front and centre the transmission potential of this uncertainty through elevated volatility in financial markets and the potential ‘wealth effect’ of negative asset returns on consumer sentiment. Bifurcated consumer spending patterns leave Australia particularly susceptible to these outcomes. Historically, the RBA has preferred to be late rather than early in reacting to shifting market conditions, and it’s hard to imagine this behaviour would change in current environment.
The divergence between goods and services inflation over the last 12 months remains a key risk for inflation expectations in Australia (see chart above). Problematically for the RBA, the global goods disinflation trend is starting to reverse.
Despite a return of market forces in 2025, we don’t expect a material shift in expectations around RBA’s next move. We believe it is reasonable for the market to continue to ascribe a 75-80% chance of a cut being delivered in May, with another cut on the horizon later this year.
Martin Wilkinson
Head of Investments
Adam Downy
Investment Analyst
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