Deutsche Bank’s Phil O’Donaghoe said the bank now expects the RBA to lower rates by 25 basis points at its next meeting on 8 July.
“Previously, we expected no change in July, and a 25 bp cut at the August meeting,” O’Donaghoe said.
“We still expect a further 25 bp cut in August, then another 25 bp cut in November. So the only change to our RBA profile this year is to add another cut in July. Our terminal rate this easing cycle remains at 3.1 per cent, so we now see the RBA arriving there in November, rather than February.”
The chief economist highlighted, however, that Deutsche Bank’s case for a cut rests primarily on the domestic backdrop.
“Global uncertainty is extraordinarily elevated and is unlikely to be resolved one way or another by the July meeting. But nothing in that global backdrop appears pressing enough (from Australia’s perspective at least) to overwhelm the compelling domestic case for easier policy,” he said.
VanEck’s head of investments and capital markets, Russel Chesler, cautioned that markets may be too quick to price in an 80 per cent chance of a rate cut next month, warning the outlook could be “hasty” amid the risk of renewed supply- and demand-side shocks despite faster-than-expected inflation declines.
Chesler cautioned that economic data tends to reflect past conditions, not the present.
“The speed at which oil prices have changed this week demonstrate how quickly supply- and demand-side shocks have been materialising in the current environment, suggesting that changes to monetary policy should apply meaningful consideration to imminent risks posed by global tariffs and escalating geopolitical conflict,” Chesler said.
He noted the US Federal Reserve’s chair, Jerome Powell, echoed this forward-looking caution, underscoring risks that backward-looking data may underestimate inflation pressures later this year.
“We consider this messaging relevant for the domestic economy, too, with two rate cuts this year already starting to drive price growth in the property sector,” Chesler said.
He suggested delaying further RBA cuts until the next quarterly inflation print at the end of next month to better gauge risks.
Meanwhile, State Street Global Advisors’ APAC economist, Krishna Bhimavarapu, believes the RBA should cut rates in July to safeguard growth, pointing to weak consumption and subdued Q2 growth.
“We are tracking faint consumption and growth in Q2, and hence, the bank may do well to frontload the cut to July. However, we think the cash rate might still end the year at 3.10 per cent, as the RBA might take a pause after frontloading cuts,” Bhimavarapu said.
CBA has also shifted its base case to expect a 25 basis point rate cut in July, followed by another in August, potentially bringing the cash rate down to 3.35 per cent. Its senior economist cited a combination of a dovish May RBA meeting and steady labour market conditions supporting a “swifter return of the cash rate to neutral”.
However, CBA warned the July decision will be finely balanced.
“The decision to the cut the cash rate in July will still be a close one. We expect there to be a discussion of both leaving the cash rate on hold and cutting by 25 bp,” Belinda Allen said.
“The case to leave the cash rate on hold would be around diminished trade uncertainty since the heightened May environment, a still tight labour market and wanting to see a full quarterly CPI print. We expect though a 25 bp cut will make the stronger argument.”
According to Allen, key data since the last RBA meeting includes below-expectation gross domestic product growth of 0.2 per cent quarterly, weakening business and consumer sentiment, and a steady unemployment rate at 4.1 per cent.
As inflation cools, Allen said CBA thinks the path is clear for the RBA to move the cash rate swiftly back to a more neutral rate of some 3.35 per cent.
“Maintaining the current restrictive settings for too long raises the risk of inflation undershooting the midpoint,” Allen said.
“Once back to neutral, the RBA will then be able to pause and assess the domestic environment and consider if taking rates below neutral is needed.
“The risk sits with a further rate cut later in 2025 or early 2026 depending on the transition of growth from the public to private sector and any emerging evidence that inflation risks undershooting. A wild card, of course, is the uncertain global environment which could also encourage the RBA to take the cash rate below neutral more quickly.”
On Wednesday, the latest figures from the Australian Bureau of Statistics confirmed Australia’s monthly consumer price index rose 2.1 per cent in the year to May 2025.
The monthly increase came in below market consensus which stood at 2.3 per cent.
The 2.1 per cent annual CPI inflation in May was down from 2.4 per cent in April and the lowest since October 2024.
The largest contributor to the annual movement was food and non-alcoholic beverages (+2.9 per cent). This was followed by housing (+2.0 per cent) and alcohol and tobacco (+5.9 per cent).
Annual trimmed mean inflation, meanwhile, was 2.4 per cent in May 2025, down from 2.8 per cent in April.
“This is the lowest annual trimmed mean inflation rate since November 2021,” said Michelle Marquardt, ABS head of prices statistics.
The CPI, excluding volatile items and holiday travel measure, rose 2.7 per cent in the 12 months to May, compared to a 2.8 per cent rise in the 12 months to April.
