Reserve Bank of Australia poised for back-to-back rate cuts as tariffs darken outlook
Most economists polled by Bloomberg, as well as financial traders, expect the Reserve Bank of Australia (RBA) will lower the cash rate by 25 basis points to 3.6 per cent on Tuesday (Jul 8), bringing its cumulative easing in the current cycle to 75 basis points. Governor Michele Bullock is likely to face questioning about how much further borrowing costs will fall at her media conference at 3.30 pm in Sydney.
The decision comes a day before US President Donald Trump's tariff deal deadline expires and between that and geopolitical tensions, there's little downside to cutting rates. There are also a few impediments on the domestic front: monthly inflation is running near the bottom of the 2 to 3 per cent band, household spending is tepid and pessimists are still dominant in consumer sentiment surveys.
'Nothing the RBA will learn in the next five weeks makes it worth waiting until the August meeting to cut the cash rate,' said Luci Ellis, chief economist at Westpac Banking and a former assistant governor. 'Beyond the next move, things are less clear-cut and, as for other economies, increasingly driven by domestic considerations not global common shocks.'
Australia got off relatively lightly in Trump's effort to reshape international trade, receiving a 10 per cent baseline tariff. Still, Prime Minister Anthony Albanese is aiming for an even better deal, given his country has a free-trade agreement with the US and runs a long-term trade deficit with it.
The re-emergence of protectionist policies, heightened international tensions and a slowdown in Chinese demand have cast a shadow over Australia's export outlook. The key iron ore price has eased, weighing on resource revenues, while the Australian dollar has climbed more than 6 per cent this year. The currency's strength risks tightening financial conditions at a time of tepid demand.
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As a result, investors will focus on Bullock's messaging at her post-meeting press conference about the future policy path. Money markets imply two further cuts this year, taking the cash rate to 3.1 per cent. Most economists are of the view that the RBA will opt for an extended pause after reaching 3.35 per cent to assess the impact of its easing to date.
'We expect the governor to acknowledge a third consecutive move is possible, but list a swathe of criteria that will be relevant' to any future easing, said Ben Jarman, an economist at JPMorgan. 'Such an open-ended response would implicitly push back a bit on the August pricing.'
Bank of America's Nick Stenner is among those predicting no change. His case: the closely-watched trimmed mean inflation gauge is forecast to overshoot the 2.5 per cent target midpoint in key quarterly data due at month's end, while unemployment will likely undershoot the RBA's 4.2 per cent estimate.
Moreover, unit labour costs are elevated due to weak productivity, suggesting upside risks to inflation, he added.
The RBA's dovish tilt aligns more closely with peers such as the European Central Bank, Bank of Canada and the Bank of England, which have cut in recent months. By contrast, the Federal Reserve has kept policy unchanged till the first half of 2025. The Reserve Bank of New Zealand meets on Wednesday and it's also likely to hold the following 2.25 percentage points of cuts since August 2024.
The RBA's meeting on Tuesday also holds a degree of institutional significance. It will be the first for new Treasury Secretary Jenny Wilkinson, whose role entitles her to a seat on the rate-setting board. Her appointment means that Australia's two premier economic institutions are now run by women.
The board will also deliberate on increased transparency for decisions. It is expected to revisit the question of unattributed votes following reports that members may be open to publishing more detail around internal dissent, a departure from the bank's historically opaque approach. BLOOMBERG
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