“Fireworks will have to wait”: Market firms up on RBA 25bp rate cut

The latest market commentary has confirmed consensus expectations of a 25-basis-point reduction to the official cash rate by the Reserve Bank of Australia (RBA) ahead of their meeting this afternoon, despite some still holding out for different outcomes.

Contending results, including a rate hold or an ‘extreme’ 50bp rate cut, were firmly quashed by other commentators yesterday, who cited the latest consumer price index (CPI) and labour force data as key indicators for the projected rate drop.

“We believe the RBA remains on track to cut their cash rate by 25bps at the May meeting. While a few market participants have suggested reasons why a hold is not off the table, a sticky unemployment rate solidifies the path forward,” Scott Solomon, Co-Portfolio Manager of the T. Rowe Price Dynamic Global Bond Strategy, said.

“The RBA likely reiterates there’s no pre-set path for the cash rate, but we are hoping the Statement on Monetary Policy released later in the week offers insights for year’s outlook.

“With anchored inflation and a soft labour market, a gradual move towards neutral is justified, aligning with market expectations. We don’t expect meaningful RBA pushback. Instead, they’ll remind us there are a lot of scenarios that could potentially disrupt the market’s outlook. The fireworks will have to wait for another meeting.”

The CPI data from March confirmed that trimmed mean inflation had fallen within the RBA’s target range of two to three per cent at 2.9 per cent, while April’s labour force data found unemployment remained at 4.1 per cent as participation increased to 67.1 per cent.

“With inflation within the target two to three per cent band, and there being a reasonable prospect (but not the certainty) of some further decline, and with policy still in “restrictive” territory, the most judicious course would seem a further 25bp decline in the policy rate to 3.85 per cent,” GSFM investment specialist, Stephen Miller, said.

“Recall that in the wake of the April policy rate cut, RBA Governor, Michele Bullock, was at pains to quash any notion that cut was necessarily the start of a sequence of rate cuts at successive RBA meetings. That might eventuate, but as in April, the Governor this time around will also wish (rightly in my view) to give herself and the Board maximum optionality for future RBA Board meetings.

“In that sense, and given a robust labour market and reasonable wage growth, expectations in some quarters for a 50bp policy rate cut seem ‘a bridge way too far’.”

Miller also noted that the RBA has to consider the economic fallout of the Trump administration’s tariff announcements and truces, all announced in the time since the central bank’s previous monetary policy decision.

“That said, the upending of the global trade system occasioned by the Trump Administration’s tariff agenda will constitute severe headwinds for the global economy in the period ahead. That is the case despite the President walking back some elements of the ‘Liberation Day’ announcements. That walking back only mitigates the damage relative to the baseline of no change. It does not eradicate the damage. In that context a global recession by year-end remains a reasonable prospect,” he said.

“That prospect, combined with perhaps some ‘over-achievement’ on inflation relative to the current RBA projection, may mean that we do get successive policy rate reductions at future RBA Board meetings, despite the understandable unwillingness of the Governor to pre-commit to such a path.

“That unwillingness reflects, inter alia, RBA Board concerns regarding the response of firms’ pricing decisions and wage outcomes in the face of weak productivity. That is, elevated unit labour cost growth remains a brake on any willingness to open the door to policy rate cuts at future meetings.

“Nevertheless, Australia’s eschewal of retaliatory tariff measures may give the RBA a less complicated path to attacking the any egregiously adverse consequences of a global trade war.

“The absence of retaliatory measures will mean a mitigation domestically of the inflation part of the global ‘stagflation-lite’ scenario, allowing the RBA to cut rates and, if need be, to cut aggressively to forestall the inevitable decline in economic growth.”

Investors have also been warned to not get caught up in the monetary policy noise by John Birkhold, CIO and co-founder of Australian boutique investment manager TWC Invest, as concerns grow over the mispricing of company performances.

“While macro headlines continue to drive short-term sentiment, TWC believes this is not the start of a new cycle – it’s a repricing of risk, expectations and delivery,” Birkhold said.

“Monetary easing may provide temporary support, but rate cuts have largely been priced in. What hasn’t been fully accounted for is the growing divergence between stretched valuations and uneven earnings performance.

“TWC views the current environment as a valuation reset, not a stimulus-led rally. With inflation still persistent in key markets and policy support less effective than in past cycles, the next phase of leadership will be defined by fundamentals – not liquidity.”

Birkhold also confirmed several portfolio moves TWC has made in response to these market conditions, including:

• “Exited Amazon – Flagged as a late-stage compounder with slowing returns. Valuation had run well ahead of delivery.
• Added HSBC and Marsh McLennan – Capital-efficient, stable earners with underappreciated resilience in a mixed-rate environment.
• Maintained conviction in Alphabet and Meta – Mid-cycle, monetisation-led growth names where upside is still not fully reflected in pricing.
• Increased healthcare exposure – Eli Lilly & Vertex offer pricing power, strong pipelines and high-quality execution – without valuation excess.”