At its meeting held on May 20, 2025, the Monetary Policy Board decided to reduce the cash rate target by 25 basis points, lowering it to 3.85 percent. This move comes as part of an ongoing effort to balance aggregate demand and supply, amid signs of moderating inflation and increasing global economic uncertainty.
Inflation in the Australian economy has seen a significant decline since peaking in 2022. The latest data from the March quarter further substantiates this trend. Annual trimmed mean inflation fell to 2.9 percent—marking the first instance since 2021 that it has dipped below 3 percent—while headline inflation stood at 2.4 percent, positioning it comfortably within the Reserve Bank’s 2–3 percent target range. Based on the updated staff forecasts released on the same day, headline inflation is expected to tick upward temporarily over the next year due to fading short-term factors, yet underlying inflation is anticipated to stay close to the midpoint of the target range throughout most of the forecast horizon.
Despite these positive domestic inflation indicators, the global backdrop remains turbulent. Over the last three months, uncertainty in the global economy has grown, and financial market volatility spiked significantly, although markets have partially rebounded following recent tariff-related policy announcements. However, considerable ambiguity persists regarding the full extent of these tariffs and potential policy responses from affected countries. Coupled with sustained geopolitical tensions, these developments are forecasted to exert downward pressure on global economic activity—particularly if households and firms defer spending until more policy clarity emerges.
Domestically, the outlook presents a mixed picture. On one hand, private consumption is showing signs of recovery, real household incomes are improving, and some financial stress indicators are easing. On the other hand, certain business sectors continue to report that weak consumer demand is making it challenging to transfer cost increases to final prices.
Labor market conditions remain notably tight, with employment growth continuing and labor underutilization metrics staying low. Surveys and employer feedback suggest labor shortages persist across several industries. However, despite steady wage growth, productivity improvements remain elusive, and unit labor costs are still climbing, contributing to concerns over cost pressures.
The Board acknowledged the presence of significant uncertainties in both domestic and international environments. Growth in household consumption, while expected to increase, may proceed at a slower pace than anticipated, and there’s a possibility that subdued consumption could further dampen aggregate demand and deteriorate labor market conditions more sharply than expected. Conversely, strong labor market indicators could signal better-than-forecast outcomes.
Given these evolving dynamics, the Board concluded that inflation risks are now more balanced. With inflation inside the target band and global developments expected to exert a disinflationary effect, the Board deemed that the time was appropriate to slightly ease monetary policy. This 25 basis point reduction is aimed at supporting the domestic economy while maintaining inflation within the acceptable range.
The Board emphasized that future policy decisions will continue to be data-dependent, with particular focus on inflation trends, labor market performance, and international economic developments.