The Reserve Bank of Australia appears set to cut interest rates at its May 20 meeting. Financial markets, banks, and economists expect a 25-basis-point reduction. The current cash rate stands at 4.1 per cent, unchanged since the April 1 meeting. That decision came before US President Donald Trump imposed tariffs that triggered a global trade war.
Figure 1: Expected Change in cash rate till September 2026
Markets React to ‘Liberation Day’ Tariffs
Trump’s tariff announcement on April 2 in the US, April 3 in Australia, jolted financial markets worldwide. The ASX rate tracker shifted to a 51 percent chance of a rate cut that day. The probability surged to 100 per cent before stabilising around 79 per cent. Analysts now believe a cut is certain, barring any sudden economic shifts.
Commonwealth Bank Expects 25bp Cut
The Commonwealth Bank expects the RBA to reduce the cash rate by 25 basis points. It warned a 50 bp cut remains possible if global risks worsen. “It has felt longer than two weeks since the April RBA Board Meeting,” CBA stated. “The US trade war has escalated, financial markets have been extremely volatile and global growth fears have become more than a tail risk.”
CBA Economist Notes Policy Room
CBA senior economist Belinda Allen said current policy settings allow room to go lower if required. The RBA’s April minutes noted that “financial conditions in Australia had eased a little” since February. However, they said conditions “were still restrictive”.
Markets Price In Five Cuts by Year-End
Interest rate futures now suggest the official cash rate could fall to 2.9 percent by December. That implies up to five quarter-point cuts within the calendar year. Before the April tariffs, markets only expected two cuts.
Also Read: Tariffs, Turmoil, and Tension: Why May’s Rate Cut Looks Unstoppable
Economists Shift Forecasts
Earlier in April, twelve economists expected no rate change in May. Now only four maintain that view. Judo Bank’s Warren Hogan has joined the majority. “We’re caught right in the middle of this trade war between the world’s two biggest economies,” Hogan said.
Some Still See Reasons to Wait
PinPoint Macro Analytics, Macroeconomics Advisory, Morgans Financial, and KPMG continue to expect no change. Michael Blythe from PinPoint said, “Governor Michele Bullock last week showed she was in no rush to cut interest rates.” The RBA’s April minutes highlighted that May would be “an opportune time” to review policy settings.
CPI and Jobs Data Crucial
CBA forecasts trimmed mean CPI at 0.6 per cent for Q1 2025. The monthly CPI indicator shows inflation likely falling below 3 per cent. The March labour force report, due Thursday, is expected to show a 4.2 per cent unemployment rate. Q1 wages and another labour market update will follow before May 20.
NAB Calls for 50bp Cut
National Australia Bank expects the RBA to act decisively. Taylor Nugent from NAB said, “Higher barriers on US trade and elevated policy uncertainty put net downward pressure on both growth and inflation in Australia.” NAB is the only major forecaster calling for a 50bp cut in May.
Housing Market at Centre of Debate
Lower rates increase borrowing capacity and reduce mortgage repayments. This trend usually lifts home values. The RBA has warned about this in its April board minutes. “Historical experience both in Australia and abroad suggested that periods of lower interest rates can coincide with riskier borrowing activity,” the minutes stated.
Figure 2: Australia’s Dwelling Price Growth and RBA Cash Rate over the years
Government Policy May Fuel Prices
The Albanese government introduced new housing measures. Lenders no longer need to include student debt in serviceability calculations. Compare the Market estimates borrowing capacity will rise by up to $95,000 for some buyers. First home buyers can now enter the market with a 5 per cent deposit. The government will guarantee 15 per cent of the mortgage.
Economists Urge Caution
Brendan Rynne from KPMG said the impact of tariffs on Australia’s GDP is limited. “This small decline in GDP – while incredibly unhelpful and unnecessary – means there is no need for emergency fiscal or monetary policy responses (at this stage),” Rynne said. Michael Knox from Morgans noted the uncertain impact from global negotiations involving 130 countries.
RBA Balancing Growth and Risk
The RBA is watching inflation, wages, and employment data closely. The April CPI data, due April 30, will help shape its decision. Consumer confidence has fallen since the tariff announcement. The ANZ-Roy Morgan index showed a sharp drop in sentiment. Many households expect relief through lower borrowing costs.
Future Rate Cuts Remain on Table
Markets now price a 34 percent chance of a 50 bp rate cut in May. The RBA’s primary challenge is to support economic growth without fuelling risky lending or rapid house price gains. The decisions made in the next few weeks will significantly shape Australia’s economy through 2025.
