The Reserve Bank of Australia (RBA) is expected to lower its key interest rate by 0.25 percentage points on May 20, 2025 bringing it to 3.85%, the lowest level in two years.

This reduction would mark the second cut of the year as inflation pressures ease and global trade tensions stabilize.

Governor Michele Bullock is likely to strike a cautious tone after the announcement, with recent economic data pointing to a “hawkish cut” scenario.

Although inflation and wage growth remain elevated, these pressures may limit the RBA’s ability to commit to further cuts.

New forecasts are expected to show lower projections for inflation, GDP, and job growth, while highlighting persistent wage pressures and weak productivity.

Despite low unemployment and moderate inflation, the RBA faces policy trade-offs, as government reforms to boost productivity remain uncertain.

🔗 Source: Bloomberg

🧠 Food for thought

1️⃣ Australia’s cautious monetary approach reflects a distinctive policy balance

The RBA has maintained a more conservative approach to monetary policy compared to other central banks, with the expected cut to 3.85% still higher than pre-pandemic levels.

Australia’s current cash rate is lower than Canada (5.0%) and New Zealand (5.5%), reflecting the RBA’s more measured approach to both raising and cutting rates during this cycle1.

This cautious stance has helped Australia maintain a lower unemployment rate increase (just 0.6 percentage points since mid-2022) compared to peers like the US, UK, Canada, and New Zealand2.

The RBA’s approach demonstrates a delicate balancing act between controlling inflation and preserving employment gains, a strategy that appears to be yielding relative stability even as other economies face more pronounced fluctuations.

When viewed against Australia’s inflation history, this approach aligns with the successful inflation targeting regime established in 1993, which has kept inflation averaging 2.5% over the long term3.

2️⃣ Productivity challenges complicate the path to sustainable non-inflationary growth

Australia’s productivity growth has fallen to its lowest level in 60 years, creating a fundamental economic challenge that monetary policy alone cannot resolve4.