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The latest RBA minutes show the central bank is favouring a cautious approach to interest rate policy amid heightened global uncertainty and market volatility.
The Reserve Bank of Australia (RBA) has revealed that global policy uncertainty, combined with domestic inflation and labour market data, drove the board to “move cautiously and predictably” in cutting interest rates by 25 bps in May.
In its minutes for the May/June cash rate decision, the central bank outlined its rationale for dropping rates to 3.85 per cent and said the decision would ensure monetary policy remained “predictable at a time of heightened uncertainty, given market expectations”.
The decision would also leave the board well-placed to respond to economic changes, according to the RBA.
The RBA minutes explicitly said that the board “agreed that developments in the domestic economy on their own justified a reduction in the cash rate target and that the case for that action was strengthened by developments in global trade policy”.
Board members also said that even if they had made a larger, 50-bp interest rate reduction last month, the decision should not have been taken as implying that the cash rate path would be lower over the entire forecast period, only that it would reach the same level sooner.
‘Uncertainty’ overload
The minutes, which included the words ‘uncertain’ and ‘uncertainty’ 21 times, highlighted the central bank’s concerns over an unpredictable global policy environment and volatility in Australian markets in response to US tariffs.
They also said that future tariff decisions remained “highly unpredictable”.
Looking ahead, the RBA board said: “The outlook for the global economy had deteriorated over the preceding three months, given developments in trade policies.”
RBA governor Michele Bullock echoed this sentiment in a press conference after the central bank’s May announcement, saying: “Since our last meeting, global economic and policy uncertainty has increased substantially following tariff announcements by the US administration… It’s been a complete roller coaster.”
Inflation and mortgage rates considered
The RBA has previously said that its primary objective is to return inflation to the midpoint of its 2–3 per cent target range while sustaining employment gains.
The central bank achieved this inflation goal earlier in the year, after data for the March quarter showed the annual trimmed mean of inflation fell within the target range for the first time in more than three years.
The RBA minutes showed the board welcomed the easing in underlying inflation and “provided welcome confirmation that potential upside inflationary risks had not crystallised”.
The board said: “Underlying inflation was now expected to be around the midpoint of the 2–3 per cent target range throughout the forecast period.”
Reflecting on changes to mortgage debt, the minutes said that: “Scheduled household debt payments had eased following the reduction in the cash rate in February but were still around their highest levels since 2012.
“Extra mortgage payments remained above their pre-pandemic average, consistent with the weakness seen in household consumption.”
Members said that some banks do not automatically adjust mortgage payments following a reduction in lending rates, which would have mechanically increased extra payments into redraw accounts as interest rates fell.
The minutes also noted: “Growth in housing credit had been stable in recent months, at around its post-2008 average and a little below growth in household incomes.
“By contrast, business credit growth had been running ahead of nominal GDP growth, despite weakness in business investment. Members discussed some potential explanations for this, including business credit growth being supported by firms seeking to raise previously low levels of leverage and strong competition among lenders.“
Going forward, the minutes showed that the RBA believed its widely expected decision to drop the interest rate below 4 per cent for the first time since May 2023 left it strongly placed to respond to international developments if they were to have “material implications for activity and inflation”.
‘Policy normalisation, not expansion‘
Australia and New Zealand Banking Group head of Australian economics Adam Boyton described the tone of the RBA board minutes as “relatively upbeat“, particularly around the domestic economy.
“We see nothing in these minutes to change our view that the board will leave the cash rate unchanged in July, although it will go into the July meeting with the option to ease if conditions warrant. We still expect 25bp cuts in both August 2025 and February 2026," Boyton added.
Westpac chief economist Luci Ellis added that the minutes revealed the RBA recognised the domestic case for “policy normalisation, not expansion“.
"Our read of the RBA’s recent communication remains that it will not rush further cuts. In particular, we expect that it is not looking to follow up the May cut with one at the July meeting. August remains the most likely date for the next cut," Ellis finished.
The RBA Monetary Policy Board is next scheduled to meet on 7–8 July.
The May rate meeting marked the second session of the new Monetary Policy Board, with the RBA now having two boards – one to set the cash rate and another for governance.
[Related: RBA cuts cash rate below 4% for first time in 2 years]
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