Why the RBA opted for smaller rate cut
Global uncertainty on the back of the US President Donald Trump's tariff policy and a weakening Australian economy saw the Reserve Bank of Australia debate an outsized rate cut last month.
Minutes from the RBA's May 20 policy meeting show the central bank is still nervous about the impact of Mr Trump's trade policy but wants to move 'cautiously and predictably' in line with market expectations.
As such, households were not given an outsized 'insurance against global growth' 50 basis point rate cut. Instead, the bank highlighted the need for monetary policy settings to remain 'predictable at a time of heightened uncertainty'. RBA governor Michele Bullock speaking about the May interest rate cut. NewsWire / Nikki Short Credit: News Corp Australia
'They agreed that developments in the domestic economy on their own justified a reduction in the cash rate target and that the case for that action was strengthened by developments in global trade policy,' the minutes reveal.
Ultimately though, the board agreed the case for a 25 basis point rate cut was 'the stronger one' as members were not persuaded that weakening global growth and domestic factors warranted an outsized rate cut.
In a silver lining for households, should the impacts of global uncertainty materialise, the RBA board agreed it would need to move to 'expansionary settings' meaning there would be more cuts to the cash rate.
The board judged in May however that there was not enough data around the impacts of any global uncertainty to switch to a more expansive monetary policy setting.
'They also judged it was not yet time to move monetary policy to an expansionary stance, taking account of the range of estimates involved, given that inflation was yet to return sustainably to the midpoint of the target range and the staff's assessment that the labour market was still tight,' the minutes read. The RBA board confirmed they have further room to cut rates NewsWire / Nicholas Eagar Credit: NewsWire
The board also highlighted they had the firepower left to kickstart global growth should the worst of global uncertainty impact the local economy.
'In finalising the policy statement, members agreed that it was appropriate to convey their commitment to both of the Board's objectives,' the board said.
'They also agreed to convey that policy was well placed to respond decisively to international developments if they were to have material implications for activity and inflation of the kind described in the severe downside scenario set out in the May Statement on Monetary Policy.'
Meeting for the second time under its new dual-board structure, the RBA cut the national cash rate by 25 basis points, from 4.10 to 3.85 per cent, but RBA governor Michele Bullock revealed a 50 basis point cut had been debated.
'There was an argument and we did debate it (a 50 basis point cut) but it wasn't the strongest argument in the room,' Ms Bullock said at the time.
Unemployment Figures
She stressed 'inflation hurts everyone', particularly those on lower incomes and renters.
Responding to a question from NewsWire on whether households could expect further relief, and what message she had for those doing it tough, she acknowledged Australians had gone through a 'really rough few years', accentuated by sharp rises in everyday prices.
'I would say that bringing inflation down is the best thing we can do to help them, while keeping employment strong,' she said.
'At the moment we are on track to deliver that. I know you're doing it tough, but conditions are improving.'
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