Australia Cuts Interest Rate to 2-Year Low as Inflation Cools: Is This the Start of a Policy Shift?

May 20, 2025 – In a widely anticipated move, the Reserve Bank of Australia (RBA) has cut its benchmark interest rate by 25 basis points, bringing it down to 3.85% — the lowest level since May 2023. This decision reflects a significant easing in inflationary pressures in Australia and signals the RBA's willingness to loosen monetary policy to support growth.

Inflation Eases, Giving the RBA Room to Move

According to the RBA’s latest policy statement, Australia’s headline inflation fell to just 2.4% in Q1 2025 — the lowest in four years and well within the central bank’s target range of 2% to 3%. The RBA stated that inflation risks have “substantially diminished,” allowing policymakers the flexibility to shift focus toward stimulating the economy.

Still, the bank warned that household consumption may recover more slowly than expected, weighing on overall demand and increasing risks to the labor market.

Australia’s 2025 Economy: A Mixed Outlook

While inflation is falling, economic growth is showing modest improvement. Australia’s GDP grew by 1.3% year-over-year in Q4 2024, marking its first expansion since Q3 2023. However, uncertainty remains high due to global trade tensions and domestic challenges.

HSBC analysts recently noted that the global economy and markets have been shaken since the RBA’s previous meeting in April, especially by the U.S. “Liberation Day” tariffs — which were imposed and then suspended — creating volatility across trade and capital markets.

These disruptions are expected to have a mild negative impact on Australia’s growth, and may even bring disinflationary pressure due to weaker global demand and redirected exports from China to non-U.S. markets, including Australia.

Will the RBA Cut Rates Even Further?

Abhijit Surya, Senior Asia-Pacific Economist at Capital Economics, believes the RBA may cut rates more than currently expected during this cycle, and suggests the bank may be overestimating the impact of global trade disruptions on the Australian economy.

Carl Ang, Fixed Income Research Analyst at MFS Investment Management, also expects a “noticeably dovish pivot” from the RBA, forecasting a terminal rate of just 3.1% by early 2026, as downside risks and uncertainty rise.

Conclusion

With the RBA lowering rates to a two-year low, the Australian economy may see renewed support from looser monetary policy — a welcome development for businesses, consumers, and investors. However, risks from global trade policy and a fragile domestic recovery still loom large.

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Source: CNBC