The Reserve Bank of Australia (RBA) is expected to cut official cash interest rates in May in the wake of data generated this week forecast to show a drop in annual inflation.
Analysts have forecast that the RBA Board will lower the official rate by at least 25 basis points (bp), and potentially as much as 50 bp, from the current rate of 4.1% at its meeting on 19 and 20 May.
Goldman Sachs said it expected March quarter consumer price index (CPI) data on Wednesday to show a drop in the annual rate of inflation from 2.4% for the headline rate, and 3.2% for the trimmed mean, in the December quarter.
The investment bank said it expected the quarterly trim-mean measure to rise 0.6% quarter-on-quarter and 2.8% year-on-year.
CommSec said Commonwealth Bank (CBA) economists expected the trimmed mean CPI, which is the RBA’s preferred measure of core inflation, to increase 0.6% in the quarter with the annual growth rate easing to 2.8%.
“Such an outcome could be a catalyst for the RBA to cut interest rates again in May,” CommSec said in its Economic Weekly Market Report.
There is a 62% expectation of a 50 bp decrease to 3.60% at the next RBA Board meeting, according to the Australian Securities Exchange’s (ASX) RBA Rate Indicator.
This probability measure, which shows market expectations of a change in the official rate based on ASX 30 Day Interbank Cash Rate Futures prices, has dropped from 79% since 11 April.
“Lock it in, no need to wait for the CPI: RBA Monetary Policy Board expected to cut by 25 bps at its 20 May meeting,” Westpac Chief Economist Luci Ellis wrote in an article.
“Holding rates steady in the face of the global turmoil and softer momentum in the labour market – for the sake of 0.2 (percentage points) on inflation – would be very hard to explain.”
Ellis expected two further cuts totalling 50 bps in August and November. He said the risks of timing and extent were now skewed to the RBA moving faster than this and or going further.
National Australia Bank has forecast a 50 bp drop in May followed by four 25 bp cuts, lowering the rate to 2.6% by early 2026, while ANZ expects 25 bp reductions in May, July and August.
“Indeed, ANZ Research would not rule out a 50 basis point cut in May, if sentiment sours and the global growth outlook deteriorates sufficiently,” ANZ’s Head of Australian Economics Research Adam Boyton said in an article.
The RBA lifted the official cash rate 13 times from a COVID-19 pandemic low of 0.25% after March 2020 to crush rising inflation, which peaked at 7.8% in December 2022, and did not cut again until February, when the rate reached 4.35%.
