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Australia's Economy Shows Signs of Softening, With Inflation Easing and Expectations of Interest Rate Cuts Growing

Strategic Insights

— 1 min read

Australia's economic growth is showing signs of slowing, with inflation easing to 2.1% year-on-year in May, down from 2.4% in April. This represents the smallest annual increase since October 2024, placing headline inflation squarely within the Reserve Bank of Australia's (RBA) 2-3% target band. The trimmed mean, the RBA's preferred measure of underlying inflation, also declined to 2.4% from 2.8%. Financial markets reacted swiftly, with overnight index swaps pricing in a 96% probability of a standard rate cut at the RBA's July meeting, up from 84% prior to the data release.

Key Takeaways:

  • Inflation eased to 2.1% year-on-year in May, down from 2.4% in April, which is the smallest annual increase since October 2024.
  • The trimmed mean, the RBA's preferred measure of underlying inflation, declined to 2.4% from 2.8%.
  • Financial markets predict a 96% probability of a standard rate cut at the RBA's July meeting, up from 84% prior to the data release.
  • Economists such as Commonwealth Bank of Australia senior economist Belinda Allen, HSBC chief economist Paul Bloxham, and RBC Capital Markets chief economist Su-Lin Ong expect consecutive interest rate cuts from the RBA.
  • The RBA has already cut rates twice since February, with the cash rate currently at 3.85%.
  • Economists highlight broad-based disinflation, with weaker March quarter GDP, deteriorating May business conditions, and a stable 4.1% unemployment rate over the past five months.

Statistics:

  • 96% probability of a standard rate cut at the RBA's July meeting, up from 84% prior to the data release.
  • 2.1% year-on-year inflation rate in May, down from 2.4% in April.
  • 2.4% trimmed mean inflation rate in May, down from 2.8%.
  • 3.85% cash rate, with expectations of cuts to 3.35% by August, and 3.1% by Q1 2026.
  • 75 basis points of easing by 2026, according to HSBC's Paul Bloxham.

Sources:

  • Commonwealth Bank of Australia (no date provided)
  • HSBC (no date provided)
  • RBC Capital Markets (no date provided)
  • Deutsche Bank (no date provided)
  • National Australia Bank (no date provided)
  • AMP (no date provided)

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