RBA Poised for Further Cut
The Reserve Bank of Australia is expected to cut interest rates again on Tuesday. Market data suggest a 95% chance of a quarter-point drop. This would mark the second rate cut in 2025.
Lower Rates Fuel Borrowing Power
Lower interest rates increase borrowing capacity for home buyers. This can push property prices higher, which are already at record levels.
Economists See Limited Cuts Ahead
Most economists support a cut due to inflation easing into the RBA’s target range. Consumer confidence remains low, which may comfort the RBA. Economists no longer expect large cuts or rapid reductions.
Labour Market Remains Resilient
Australia’s unemployment rate held at 4.1% for over a year. The economy added 125,000 jobs in March and April. Wages continue to rise steadily.
Commonwealth Bank’s Gareth Aird said, “Our view is that the proverbial inflation dragon has been slayed but we are not convinced the RBA will share that view just yet given the unemployment rate is still [low].”
Markets Scale Back Cut Expectations
Markets now predict only three more rate cuts this year. ANZ analysts said the Tuesday cut is no longer certain. They expect only two more rate reductions in 2025.
Buyers Regain Confidence
The February rate cut to 4.1% triggered a rise in buyer activity. Domain economist Nicola Powell reported increased buyer confidence in May.
“Confidence is slowly coming back for buyers,” Powell said.
Inquiries on Domain dropped but remained above 2024 levels in the March to April quarter.
“Once we see more rate cuts coming through, that’s probably where we’re going to see much greater change,” Powell said.
Auction Activity Grows
Cotality reported clearance rates rose to 65% in early May. This was the highest level since July 2024, indicating increased buyer interest.
Loan Demand Could Climb
Urban economist Terry Rawnsley said demand could lift housing loans and building approvals. These dropped earlier in the year.
He said open home traffic and auction attendance may rise. However, high rates and low affordability will cap price growth.
“It’s not going to be a boom market by any stretch of the imagination,” Rawnsley said.
“People are really stretched at their budgets, and there’s not much upwards capacity for people to find more money to put into housing.”
Affordability Stretches Buyers
Cotality data showed one in three homes now costs over $1 million. That’s about 13 times the average Australian adult’s income.
Nikki said she and Matt closely tracked interest rates and property prices.
“When you’re growing up, you think of a million-dollar home as being like a mansion [but] now a million dollars doesn’t really get you much any more,” Nikki said.
“We just didn’t want the house market and prices to go up drastically [and] in the future there’s probably a lot more people, with interest rate cuts, that might be looking.”
May Cut Seen as Likely but Limited
The March quarter consumer price index supports a 25 basis point cut. The trimmed-mean result hit 2.7%, matching RBA forecasts.
April labour data showed a healthy market. Unemployment stayed at 4.1% with record high participation and strong job gains.
Wages rose at moderate levels, though weak productivity raises doubts about sustainability.
Governor Maintains Flexible Approach
After the February cut, Governor Michele Bullock stressed the move didn’t signal a trend. She may again avoid pre-committing to future cuts.
Some economists called expectations of a 50-point cut “a bridge way too far.”
Global Risks Influence RBA Caution
Global trade remains uncertain due to earlier US tariff actions. President Trump’s partial reversal of tariffs reduced damage but didn’t remove it.
Economists warn of a potential global recession by year-end. Australia’s avoidance of retaliatory tariffs gives the RBA more policy flexibility.
This could allow sharper future cuts if inflation continues falling. The RBA may act aggressively to avoid growth declines.
Some analysts suggest the rate could fall below 3% by year-end. They say this would reflect economic strain, not strength.
Governor Bullock is unlikely to speculate on long-term moves in her Tuesday briefing.
