The Reserve Financial institution of Australia lowered its money fee by 25 foundation factors to three.85% at Tuesday’s coverage assembly, marking its second fee minimize this yr after February’s preliminary easing.
However whereas the speed discount itself was broadly anticipated (markets priced in a 96% chance forward of the choice), the accompanying assertion and financial projections struck a notably extra dovish tone than anticipated, triggering a pointy selloff within the Australian greenback.
Key Takeaways:
- RBA minimize its money fee by 25 bps to 3.85% as anticipated
- GDP development forecast was lowered to 2.1% for 2025 (from 2.4%) with unemployment anticipated to rise to 4.3%
- Underlying inflation projections have been revised all the way down to 2.6% (from 2.7%), nearer to the midpoint of the goal vary
- The RBA outlined a “extreme draw back situation” the place commerce struggle escalation might push unemployment to just about 6%
- World financial uncertainty, significantly US commerce coverage, was emphasised as a key danger to the outlook
- Governor Bullock’s cautious feedback throughout the press convention helped stabilize AUD crosses
- AUD crashed instantly after the RBA’s dovish fee minimize, with losses of 0.4%-0.7% in opposition to main currencies
- Markets now count on roughly 85bps of extra cuts by mid-2026
In its Could Financial Coverage Assertion, RBA considerably revised its financial projections, with GDP development forecast at simply 2.1% over 2025 (down from 2.4% in February) and a pair of.2% in 2026.
The unemployment fee is now anticipated to rise to 4.3% (up from 4.2%) and stabilize at that degree, representing a barely weaker labor market outlook.
On inflation, the RBA now tasks underlying inflation to settle round 2.6% (down from 2.7%), close to the midpoint of the 2-3% goal vary all through the forecast interval, whereas headline inflation was projected to succeed in 3.0% by mid-2025 earlier than moderating.
The central financial institution additionally introduced various eventualities together with a “commerce struggle” situation the place unemployment might rise to just about 6% and a “commerce peace” situation that may result in stronger development and probably increased inflation, reflecting the excessive diploma of uncertainty within the present surroundings.
Hyperlink to official RBA Financial Coverage Assertion for Could 2025
In her presser, RBA Governor Bullock emphasised that the Board thought-about a “extreme draw back situation” involving commerce struggle escalation that would push unemployment to just about 6% and inflation all the way down to 2%, highlighting the RBA’s readiness to reply to worldwide developments if wanted.
Whereas acknowledging draw back dangers from world commerce tensions, she additionally emphasised the RBA’s readiness to reply decisively if wanted fairly than pre-committing to a selected easing path.
Hyperlink to RBA Press Convention for Could 2025
Market Response:
Australian Greenback vs. Main Currencies: 5-min
Overlay of AUD vs. Main Currencies Chart by TradingView
The Australian greenback, which was already buying and selling with a bearish lean regardless of the Folks’s Financial institution of China (PBOC) saying measured rate of interest cuts, dropped sharply and broadly on the RBA’s dovish minimize.
The commodity-related forex pulled again a few of its preliminary transfer, but in addition prolonged its losses after RBA Gov. Bullock shared that they debated slicing charges by 50bps and that they thought-about a “extreme draw back situation” involving a commerce struggle escalation.
Nonetheless, Bullock’s extra balanced tone, and her emphasis that the choice to chop was “tough” helped restrict AUD’s additional draw back momentum within the early European buying and selling.
Regardless of this partial restoration, most AUD crosses remained considerably decrease than pre-announcement ranges. AUD closed broadly decrease, with the largest losses recorded in opposition to CHF, JPY, and EUR.
Market pricing now suggests additional easing within the months forward, with roughly 85 foundation factors of extra cuts priced in by mid-2026. Yipes!
