Australia: A cut and a dovish surprise - Standard Chartered

The Reserve Bank of Australia (RBA) cut the cash rate by 25bps to 3.85%, as we had expected. The policy statement and Governor Bullock's subsequent press conference both screened as dovish. An escalation in trade tensions or labour market weakness may spur more aggressive RBA policy easing, Standard Chartered's economist Nicholas Chia report.

25bps cut a 'consensus' decision

"The RBA lowered the cash rate by 25bps to 3.85% at its 20 May monetary policy meeting, as we and the market had expected. But we were surprised by the dovish overtones in both the RBA Statement on Monetary Policy (SoMP) and Governor Bullock's subsequent press conference, where she characterised the rate decision as a 'confident cut'."

"Our reading of the RBA's policy decision is that it is attaching more weight to the labour market side of the dual mandate, now that trimmed mean inflation is back within the 2-3% target band. In the last line of the policy statement, it replaced the reference to 'returning inflation to target' with 'focused on its mandate to deliver price stability and full employment'. The SoMP stated that risks to inflation have become more 'balanced', whereas the RBA had warned of stalling disinflation in the February SoMP. Overall, we think the RBA remains eager to preserve labour market gains, even as it conceded that its assessment of full employment is 'uncertain'."

"We maintain our call for just one more 25bps cut in Q3, taking the terminal cash rate to 3.60%. Our baseline differs from what is priced in by the market (c.67bps of cuts, or 3.2% by end-2025), but we await Q2 CPI data before considering any changes. We expect the RBA to ease policy at meetings accompanied by the SoMP, as these meetings come after the release of the quarterly CPI print with updated economic forecasts."