RBA Expected to Ease Policy Further as Inflation and Economy Slow Down

The Reserve Bank of Australia (RBA) is likely to ease its monetary policy further in May, with a strong majority of economists predicting a third 25 basis point rate cut on Tuesday. This shift in expectations comes as inflation eases faster than anticipated, and the economy slows down.

A recent Reuters poll of 37 economists revealed that over 60% of respondents, or 23 out of 36, forecast another quarter-point cut this quarter, taking the cash rate to 3.35%. The median forecast pointed to a year-end cash rate of 3.10%, but there was no clear consensus among economists on where the rate would end in 2025.

The RBA's decision to ease policy further is driven by the weakening growth outlook and falling inflation. Official data showed that the economy expanded just 0.2% in Q1 2025, a slowdown from 0.6% in Q4 2024. Consumption has been softer than anticipated, which has led to a more dovish outlook.

"A large part of the reason why the RBA has now found itself on a rate-cutting path that's steeper than what it would have thought at the beginning of the year is because...consumption has been softer than the RBA anticipated," said Luci Ellis, chief economist at Westpac.

The economy is forecast to grow 1.6% this year and 2.3% in 2026, a downgrade from 2.0% and 2.4% from the April poll. This slowdown in growth has led economists to expect more rate cuts, with some predicting that the RBA will deliver another cut in August.

"The May meeting was notably more dovish in the outlook and that's going to manifest in cutting in July. I suspect the RBA will keep the option open for further easing and that's why there will be a follow-up cut in August," said Philip O'Donaghoe, chief economist for Australia and New Zealand at Deutsche Bank.

Despite deeper rate cut expectations, the Australian dollar has gained over 6% so far this year, lifted by broad U.S. dollar weakness. The currency is forecast to strengthen about 2% over the next six months, according to a separate Reuters poll.

The RBA's task now is to make sure that growth remains strong enough to keep the labor market strong. With inflation averaging 2.6% in 2025 and 2.7% in 2026, within the RBA's 2-3% target band but near the upper bound, the central bank will need to carefully balance its policy decisions.

Economists' Predictions on Rate Cuts

The Reuters poll showed that a strong majority of economists, or 31 out of 37, predicted the RBA would cut its official cash rate by 25 basis points to 3.60% at the end of its two-day meeting on July 8. Six expected no change.

Here are some of the key predictions from the poll:

• 23 of 36 economists forecast another quarter-point cut this quarter, taking the cash rate to 3.35%.
• The median forecast pointed to a year-end cash rate of 3.10%.
• There was no clear consensus among economists on where the rate would end in 2025.
• 16 of 33 projected 3.10%, while 15 expected 3.35%.
• One economist saw 3.60%, and two predicted 2.85%.

Impact of Rate Cuts on Economy

The RBA's decision to ease policy further is likely to have a significant impact on the economy. With growth slowing down, the central bank will need to carefully balance its policy decisions to avoid exacerbating the slowdown.

"A large part of the reason why the RBA has now found itself on a rate-cutting path that's steeper than what it would have thought at the beginning of the year is because...consumption has been softer than the RBA anticipated," said Luci Ellis, chief economist at Westpac.

The economy is forecast to grow 1.6% this year and 2.3% in 2026, a downgrade from 2.0% and 2.4% from the April poll. This slowdown in growth has led economists to expect more rate cuts, with some predicting that the RBA will deliver another cut in August.

Global Headwinds and Trade Deal

The lack of a trade deal ahead of the July 9 expiry of a 90-day pause on U.S. President Donald Trump's sweeping tariffs on trading partners announced in April has raised concerns about the impact on the economy.

"If some of those global headwinds...feed through into more precautionary saving from households, then that could spur the RBA to deliver a little bit more support," said Taylor Nugent, senior economist at NAB.

The Australian dollar has gained over 6% so far this year, lifted by broad U.S. dollar weakness. The currency is forecast to strengthen about 2% over the next six months, according to a separate Reuters poll.

Conclusion

The RBA's decision to ease policy further is driven by the weakening growth outlook and falling inflation. With consumption softer than anticipated, the central bank will need to carefully balance its policy decisions to avoid exacerbating the slowdown. The economy is forecast to grow 1.6% this year and 2.3% in 2026, a downgrade from 2.0% and 2.4% from the April poll.