Sharemarket, borrowers prime for next Reserve Bank rate cut, sooner than they think

Australia’s cooling inflation figures have more economists predicting the Reserve Bank will deliver another interest rate cut at its July meeting, just in time to soften the sharemarket pain brought on by the Middle East war.

Swaps are now implying a 96 per cent chance of a standard cut at the July RBA meeting. Picture: Lyndon Mechielsen / The Australian

Borrowers and the sharemarket are suddenly faced with the prospect of consecutive interest rate cuts from the Reserve Bank of Australia, cushioning the damage inflicted by war and higher petrol prices.

More economists are forecasting another cut in July after inflation data showed easing price pressures.

Australia’s monthly CPI indicator for May showed inflation slowed to just 2.1 per cent year-on-year, down from 2.4 per cent in April and below expectations of 2.3 per cent. This marks the smallest annual rise since October 2024 and places headline inflation firmly within the RBA’s 2-3 per cent target band.

More importantly, the trimmed mean measure of underlying inflation eased to 2.4 per cent from 2.8 per cent. This measure has now remained within the RBA’s target band for six consecutive months, suggesting policy has successfully tamed inflation.

Governor Michele Bullock Picture: NewsWire / Nikki Short

A 3.6 per cent cash rate would bring Australia more in line with the global easing cycle already underway in other advanced economies. The RBA has delivered two interest rate cuts since February for a 3.85 per cent cash rate.

Financial markets responded swiftly, with overnight index swaps now implying a 96 per cent chance of a standard cut at the July meeting, up from 84 per cent before the data release.

Heading into the CPI result, the consensus was that the RBA wouldn’t cut rates again until the December quarter. That has changed.

“We expect the RBA to cut the cash rate in both July and August which would see the cash rate sit at 3.35 per cent,” said CBA senior economist, Belinda Allen.

Ms Allen points to a sequence of economic data that should reassure the RBA, including March quarter GDP figures that missed expectations, deteriorating business conditions in May, and an unemployment rate stable at 4.1 per cent for five consecutive months.

“While the jobs market has remained resilient, GDP growth in Q1 was sluggish, and today’s data points to further disinflation,” said HSBC’s Paul Bloxham, who sided with a cut in July.

“The global backdrop also continues to pose significant risks.... We expect a total of 75 basis points of easing, taking the cash rate down to 3.1 per cent by Q1 2026.”

Borrowers could see a 3.1 per cent cash rate next year, economists say.

RBC chief economist Su-Lin Ong also added July to her previous forecasts of August and November cuts.

“The breadth of moderation in today’s May CPI following the easing trend in annual services and non-tradable inflation in Q1 is likely to give the RBA more confidence that inflation is now sustainably within target and moving to mid-point,” Ms Ong said.

Deutsche Bank’s chief economist Phil Odonaghoe revised his forecasts to include cuts in July, August and September, noting that key domestic data since the May meeting have been “universally softer”.

He emphasised that while global uncertainty remains high, “nothing in that global backdrop appears pressing enough from Australia’s perspective to overwhelm the compelling domestic case for easier policy”.

NAB head of market economics, Tapas Strickland, observes that services inflation in the monthly CPI indicator hit a three-year low of 3.3 per cent in May, which should give the RBA “greater confidence that there is further room to ease policy back to a more neutral setting”.

However, he injected a note of caution into the debate, pointing out that a 7 per cent monthly fall in holiday travel prices was exaggerated by seasonal factors related to the Easter and ANZAC Day long weekends. NAB continues to predict cuts in July, August and November.

And Indeed APAC economist Callam Pickering said the RBA can “cut with confidence” next month.

“The RBA will need to cut rates at least another couple of times this year to provide sufficient support to households and businesses, while ensuring that the unemployment rate remains low and we avoid recession,” he said.

AMP economist My Bui, who was among those forecasting back-to-back interest rate cuts from the RBA, now saw sees a “perfect backdrop” for that scenario to play out.

She noted that less than a third of the CPI categories grew over 3 per cent annually.

Half showed weak price momentum below 2 per cent.

“Both our headline and trimmed mean inflation readings are now on the low end versus peers, who have largely cut rates by more than 50 basis points in this cycle,” Ms Bui said.