FinX Pulse - RBA remains cautious on rates decision

The new RBA Board held rates at 4.1% today, as expected, and can see two-sided risks to inflation. It remains "cautious", but ready to act should the outlook change. The Governor did not rule out a May rate cut when asked.

• Today the Board decided to leave the cash rate target unchanged at 4.1% and the interest rate on Exchange Settlement balances (bank reserves) unchanged at 4.0%.

• Despite the new Board taking over, there were the same 3 headings as the last few post-meeting statements from the Governor; "Underlying inflation is moderating", "The outlook remains uncertain", and "Sustainably returning inflation to target is the priority".

• Regarding the inflation outlook the governor's statement read: "Recent information suggests that underlying inflation continues to ease in line with the most recent forecasts published in the February Statement on Monetary Policy. Nevertheless, the Board needs to be confident that this progress will continue so that inflation returns to the midpoint of the target band on a sustainable basis. It is therefore cautious about the outlook".

• In the uncertainty section, the Governor said, "Private domestic demand appears to be recovering, real household incomes have picked up and there has been an easing in some measures of financial stress. However, businesses in some sectors continue to report that weakness in demand makes it difficult to pass on cost increases to final prices. 

• "At the same time, a range of indicators suggest that labour market conditions remain tight. Despite a decline in employment in February, measures of labour underutilisation are at relatively low rates and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers. Wage pressures have eased a little more than expected but productivity growth has not picked up and growth in unit labour costs remains high [...]

• "The central projection is for growth in household consumption to continue to increase as income growth rises. But there is a risk that any pick-up in consumption is slower than expected [...] Alternatively, labour market outcomes may prove stronger than expected, given the signal from a range of leading indicators".

• "The Board noted that monetary policy is well placed to respond to international developments if they were to have material implications for Australian activity and inflation". [Emphasis added]

• Tariffs were identified as the most significant overseas threat: "Uncertainty about the outlook abroad also remains significant. On the macroeconomic policy front, recent announcements from the United States on tariffs are having an impact on confidence globally and this would likely be amplified if the scope of tariffs widens, or other countries take retaliatory measures. Geopolitical uncertainties are also pronounced. These developments are expected to have an adverse effect on global activity, particularly if households and firms delay expenditures pending greater clarity on the outlook. Inflation, however, could move in either direction. Many central banks have eased monetary policy since the start of the year, but they have become increasingly attentive to the evolving risks from recent global policy developments".

• Regarding the decision to hold, the Governor said, "The Board’s assessment is that monetary policy remains restrictive. The continued decline in underlying inflation is welcome, but there are nevertheless risks on both sides and the Board is cautious about the outlook".

  
  

Fin-X Wealth View

• The statement appeared to strike a different tone to February when the Governor and other staff pushed back on market forecasts of steady cuts into 2026. There was a suggestion that cuts were more likely compared to the last meeting.

• However, the Governor said at the press conference that a cut was not discussed and that the Board was focused on the domestic economy where the inflation risks were two-way. That said, the risks emanating from overseas had grown.

• Nevertheless, when pressed, the Governor didn't take the opportunity to rule out a May cut, when the next quarterly forecasts are due and the Board will have the Q1 inflation data.

• She also said that the Budget information was already included in the February forecasts, removing some of the upside risks from the May inflation forecasts.

• Incoming labour market data and overseas news will also be important factors.

  The market is still pricing 3 more cuts this year, beginning at the next (20th May) meeting, with an implied end-2025 cash rate of 3.4%.

• See Implied rate cut expectations below, based on Bloomberg data.

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