RBA on track to neutral despite hovering ‘cocktail’ of uncertainty

The Reserve Bank of Australia’s (RBA’s) latest monetary policy decision delivered on market expectations with a 25-basis-point rate cut and points towards a relatively balanced path to neutral, but spirits were somewhat dampened by the heightened global and domestic uncertainty cited in the central bank’s statement.

Australia’s Big Four banks announced within one hour of the central bank’s statement that they would be passing on the 25bp reduction to their own variable home loan interest rates, which they said would deliver some “much-needed” reprieve for many mortgage holders in the face of ongoing cost of living pressures.

Despite this being the second cash rate cut in as little as three months and the first time it has fallen under four per cent in two years, market experts also picked up on the RBA’s strong consideration of ongoing economic uncertainty on two fronts: globally, in the form of tariffs and countries’ responses to them; and domestically, in the form of a tight labour market and slow productivity growth.

“As expected the RBA cut the policy rate by 25bp to 3.85% and lowered their forecasts for growth and inflation noting that household consumption remains soft and uncertainty around the global outlook has increased given recent tariff developments,” Adam Bowe, Executive Vice President and Head of Australia Portfolio Management at PIMCO.

“The statement acknowledged that uncertainty around the outlook was elevated and the risks for the inflation outlook were more balanced. The policy decision and updated forecasts highlight that interest rates remain restrictive which continues to weigh on household spending and broader economic growth.”

Saxo Markets Chief Investment Strategist, Charu Chanana, agreed.

“The RBA delivered a dovish rate cut, weighed down by a cocktail of global and domestic uncertainties. While inflation has eased and labour markets remain tight, the board flagged slower real income growth, weak productivity, and softer GDP and CPI forecasts.

“‘Uncertainty’ featured prominently in the statement—not just about geopolitics and trade, but also about how domestic demand, wages, and firm pricing behaviour will evolve from here. The AUD fell in response and, with the RBA sounding increasingly uneasy, the path of least resistance for the currency may remain lower—especially if domestic data softens further or global risks flare up again.”

Dwyfor Evans, Head of APAC Macro Strategy at State Street Markets, said today’s decision clearly showed the RBA’s intention to support a slower economy without discounting the progress made in the battle against inflation.

“The RBA eased the cash rate by 25bps, as widely expected. Optimism on inflation was offset to some extent by uncertainty around the tariffs and the still strong jobs market, but projections on prices and rates alludes to a roadmap towards less restrictive policy. Some talk of a ‘hawkish cut’ before the decision, but global uncertainty aside, this was a clearer directional message from the RBA than we have seen for some time.”

Despite inflation heading back into manageable territory, concerns were raised over softening productivity growth and how the RBA will contend with this precarious “balancing act”.

“While markets have priced in at least two more rate cuts in 2025, potentially taking the cash rate closer to the lower end of the 3% handle, the RBA is unlikely to commit to a clear trajectory,” commentary from exchange traded fund (ETF) provider, Global X ETFs, said.

“Flexibility remains the name of the game. The market appeared to interpret the RBA’s statement as more hawkish, with only a small probability now assigned to another rate cut in June. In a world where uncertainty is the only certainty, the central bank will want to retain optionality to pause or adjust its pace, depending on how inflation and the broader economy evolve.

“Governor Bullock has previously pushed back against overly aggressive market expectations for monetary easing. The RBA’s tone has remained relatively cautious, particularly as global economic conditions remain fluid. From geopolitical tensions to weaker growth among major trading partners, the external environment adds another layer of uncertainty.

“Despite the softening growth outlook, Australia is not in crisis territory. The domestic economy is still expanding, employment remains strong, and inflation is far more controlled than it was 12 months ago. That gives the RBA breathing room, but it also places the onus on future data to justify further easing.”

CPA Australia’s Business Investment Lead, Gavan Ord, urged for policy reform to support business growth and local productivity.

“Rate cuts will not get Australia out of its productivity straitjacket. Significant reforms are needed to move the needle on economic growth.

“We need to revitalise the business environment by removing unnecessary regulatory burdens and supporting entrepreneurship.

“If governments can shift away from regulation as the default response to every problem, and instead embrace practical solutions like education and better enforcement of existing laws, this will go a long way to creating the business-friendly environment that is so crucial to Australia’s economic success.”

“Prior expectations for an improvement in domestic growth over the balance of the year are now being challenged by headwinds to global growth, caused by rising tariffs and their potential implications for global trade and business investment,” PIMCO’s Bowe said.

“Although the direct impact of tariff developments is modest for Australia, the secondary effects—such as slower regional growth and potentially lower commodity prices—are more significant.”

VanEck’s Head of Investments & Capital Markets, Russel Chesler, weighed up the pros and cons to rate cuts and where they land across the investment universe.

“The Australian economy is in a good place at the moment, with unemployment at a historic low, and continued growth in the property market and retail sales.

“That said, rate cuts are generally good for markets, as it reduces the cost of capital and thus encourages business growth – particularly for small caps, which are typically more leveraged. The additional rate easing, while mild, suggests business input costs should improve (albeit the tight labour market means wages continue to put downward pressure on profits), which is beneficial for mid- and small-caps that tend to have lower pricing power relative to larger companies. Banks, meanwhile, may see their net interest margins come under pressure as they pass the rate cut on to their customers. It will be interesting to see how this impacts CBA’s share price, which continues to defy gravity despite price-to-earnings at an all-time high of 27x.

“The flip side of interest rates coming down is that cash products and fixed income products tend to follow, and we anticipate that investors closer to retirement age and beyond will be looking for higher yielding opportunities. In this environment, there are number of options to increase income, including Australian Tier 2 sub ordinated bonds, Australian residential mortgage-backed securities, emerging market bonds, global capital securities and global private credit. A rate cut may also weaken the AUD – which, while recovering from its lows relative to the US in April, still hasn’t pushed through the 0.65c barrier in the year to date. This is positive for exports, as it makes us more competitive against other countries, but negative for imports – a significant consideration, given the broader global tariff regime is expected to drive up the cost of many imported goods either directly or indirectly.”

However, market consensus did wean slightly when it came to forecasting the cash rate’s final resting place.

“With inflation within the RBA’s target band and expected to stay there, alongside a labour market that appears roughly balanced, we continue to anticipate the RBA will gradually lower the cash rate toward neutral over the remainder of the year,” PIMCO’s Bowe said.

“Rising global trade barriers pose downside risks to regional growth, increasing the likelihood of a steeper rate-cutting cycle by the RBA and a terminal cash rate falling below 3.0%.”

“If growth surprises to the downside, we see higher chance for the cash rate reaching our forecast 3.10% by December. Global trade dynamics are looking to be reset with fast paced discussions between many countries and in that regard, we look forward to similar initiations from Australia,” Krishna Bhimavarapu, APAC Economist at State Street Global Advisors, said.

“Our central case has the RBA delivering further cautious and gradual monetary easing, taking the cash rate to 3.10% by early 2026,” HSBC’S Chief Economist, Paul Bloxham, said.