RBA Cuts Cash Rate 25 Basis Points to 3.85% Amid Inflation Decline and Global Uncertainty

The Reserve Bank of Australia (RBA) has announced a 25 basis point reduction in the cash rate, bringing it down to 3.85%. This decision, made during the May 2025 meeting, was driven by several key factors, including the sustained decline in inflation, increased global economic uncertainty, and the complex outlook for domestic economic growth and employment.

The RBA's decision to lower the cash rate was primarily influenced by the continued easing of inflationary pressures. Since peaking in 2022, inflation has been on a downward trajectory, largely due to the balancing effect of rising interest rates on total demand and supply. The latest data from the March quarter indicated that the annualized trimmed mean inflation rate had fallen to 2.9%, the first time it has been below 3% since 2021. The overall inflation rate stood at 2.4%, well within the target range of 2-3%.

However, the RBA's decision was not solely based on domestic factors. The global economic landscape has become increasingly uncertain, with heightened geopolitical risks and significant volatility in financial markets. While recent tariff announcements have led to a temporary rebound in market prices, the ultimate scope of these tariffs and the policy responses from other countries remain uncertain. These developments are expected to have a negative impact on the global economy, particularly as businesses and households delay spending due to the uncertain outlook. This, in turn, has weakened the prospects for economic growth, employment, and inflation in Australia.

The RBA also highlighted the evolving nature of global trade policies, which introduces significant uncertainty into the core forecasts. Domestically, while private demand appears to be recovering, with improvements in household real income and some easing of financial pressure indicators, certain industries continue to report weak demand, making it difficult for businesses to pass on cost increases to final prices.

The labor market remains tight, with continued job growth and low underutilization rates. However, wage growth has slowed slightly over the past year, and productivity has not improved, leading to high unit labor costs. The RBA acknowledged that the transmission of monetary policy, business pricing decisions, and wage levels in response to demand conditions and productivity challenges all present uncertainties.

The RBA's primary goal remains maintaining low and stable inflation. With inflation currently within the target range and the upward risks diminishing due to global economic pressures, the RBA deemed it appropriate to ease monetary policy. This move will reduce the restrictiveness of monetary policy, but the RBA remains cautious about the outlook, particularly given the increased uncertainty on both the supply and demand sides. The RBA has assessed severe downside scenarios and is prepared to respond decisively if global developments significantly impact Australia's economic activity and inflation.

The RBA will continue to monitor data and risk assessments to guide its decisions, with a focus on global economic and financial market developments, domestic demand trends, and inflation and labor market prospects. The RBA is committed to its mandate of maintaining price stability and full employment, and will take all necessary measures to achieve these goals.