RBA interest rate cut in May ‘locked in’: Westpac

Economists are locking in forecasts for another interest rate cut by the Reserve Bank next month as the trade war sparked by US tariffs hikes threatens to derail the global economy.

The RBA, led by governor Michele Bullock, is widely expected to cut interest rates next month. Picture: Nikki Short/NewsWire

Economists are locking in forecasts of another interest rate by the Reserve Bank of Australia next month as the global trade war sparked by US tariff increases threatens to derail the global economy.

After cutting rates from a 14-year high of 4.35 per cent in February, the RBA emphasised the data dependency of its monetary policy.

But with the trade war escalating this month, the money market has for several weeks fully expected the RBA to decide on another 25 basis points cut in the official cash rate from its current level of 4.1 per cent when its next meeting concludes on May 20.

The RBA, led by governor Michele Bullock, is widely expected to cut interest rates next month. Picture: Nikki Short/NewsWire

National Australia Bank went so far as to predict that the RBA would deliver a hefty cut of 50 basis points in May and keep cutting the cash rate to 2.6 per cent by February 2026.

However, with US President Donald Trump subsequently announcing a 90-day pause in reciprocal tariffs against countries apart from China, most economists believe that a string of 25 basis point cuts will suffice.

March quarter CPI data next Wednesday are expected to show that underlying “trimmed mean” inflation returned to the 2-3 per cent target band for the first time since 2021.

But economists now say the economic risk from the trade war will take precedence.

“For the past several quarters, the near-term outlook for RBA policy has been data-driven,” says Westpac chief economist Luci Ellis, who was previously assistant governor of economics at the RBA.

“The turmoil abroad has, however, changed the game and flipped the risks.

“You can lock in a 25bp cut in May, even if the Q1 inflation data are a shade disappointing.”

While still expecting a further two cuts after the one expected in May, Ellis said “the risks on timing and extent have shifted to the downside, from the upside where they previously had been.”

Westpac chief economist Luci Ellis expects the RBA to cut rates next month. Picture: Monique Harmer/NCA NewsWire

ANZ’s head of Australian economics, Adam Boyton, said the CPI data were likely to support the case for a rate cut in May, and that there was “downside risk” for the Australian economy, with the trade war leading ANZ to materially downgrade its global growth forecasts.

“The impacts on Australia from tariffs and the uncertain global backdrop are likely to come less from direct tariffs themselves – only 5 per cent of Australia’s goods exports go to the US – and more from the global growth and local confidence implications,” he said.

CBA economist Harry Ottley said an expected fall in underlying trimmed mean inflation to 2.8 per cent would effectively “rubber stamp” a May interest rate cut by the RBA because of “heightened global uncertainty.”

However, he saw very little chance of the RBA delivering a 50bp cut in May.

“For that to come into play — absent an exogenous shock — we believe the trimmed mean CPI would need to print at 0.5 per cent on-quarter or lower next week, and the unemployment rate would need to jump materially in the April labour force survey,” he said.

It came as Macquarie Bank joined the rush to cut fixed rate loans. Australia’s fifth-biggest lender cut its 2- and 3-year rates by 20 basis points to 5.19 per cent, the lowest in the market.

It was the latest of 18 banks to cut at least one fixed home loan rate in the past month.

“Macquarie has taken the knife to its fixed rates ahead of next month’s RBA meeting as it ramps up competition in the fixed mortgage market,” said financial comparison site Canstar’s Sally Tindall.

“These sweeping cuts from Australia’s fifth-largest home loan lender puts the bank squarely in pole position as the lowest fixed rate lender in the market, with the most competitive fixed rates in each of the 1- to 5- year categories, when eco loans are excluded.

Economists expect the RBA to cut rates next month as the global trade war sparked by US tariffs hikes threatens to derail the global economy.

But Ms Tindall said even fixed mortgage rates as low as 5.19 per cent are still unlikely to prompt many borrowers into locking into a fixed mortgage and effectively handing over their chance to benefit from any future cash rate cuts.

“Over the last month, 18 lenders have cut at least one fixed rate, with more likely to come in the lead up to the RBA’s next monetary policy meeting, particularly now Macquarie has thrown down this gauntlet,” she said.

“However, a cash rate cut in May is not a foregone conclusion.

“While the RBA will almost certainly consider the case for a cut, it is not yet guaranteed, although we will get a clearer picture next week when the latest quarterly CPI results are released.”