RBA Monitor: Delivering hawkish cut in May emphasizing data dependency for future decisions

The Reserve Bank of Australia (RBA) is expected to deliver a hawkish rate cut at the May monetary policy meeting. The good news is that the underlying CPI inflation measured by the trimmed mean softened to +2.9% YoY in Q1-25 from +3.3% YoY in Q4-24, within the 2-3% target range.Although these results are likely to justify the RBA to lower the cash rate by 25 bps at the next meeting, we expect the RBA to remain cautious in signaling further rate cuts because of several factors. Firstly, the services inflation has remained sticky after slowing to +3.7% YoY from +4.3% YoY during the same period.  Secondly, fiscal policy will turn expansionary while the labor market is still tight. In fact, while the participation rate rose to a historical high level of 67.1% in April, the unemployment rate was flat at 4.1% below the natural rate. In that regard, the pickup in overall wages was largely driven by wage hike for childcare workers and aged care workers supported by the Albanese government (Chart 2). These Labor policies are stimulative as they ease the cost-of-living through electricity rebates and personal income tax cut.Because the government’s initiatives could bring renewed inflationary pressure, RBA’s future policy decisions could get more complicated. And yet, for the RBA next meeting, a cut is warranted as private consumption has remained subdued with real retail sales slowing to 0.0% QoQ in Q1-25 from +0.8% QoQ in Q4-24, with consumer confidence stagnating well below the pre-pandemic level. Furthermore, the Aussie has stabilized to a slightly stronger level of 0.64, which alleviates cost inflation somewhat and can accommodate a rate cut.All in all, the RBA is expected to lower the cash rate by 25 bps to 3.85% on May 20th, but still emphasizing its data dependency strategy for future decisions and keeping a hawkish tone given Albanese’s more expansionary fiscal policy