RBA Monitor: Would softer May inflation with tight labor market justify pre-emptive rate cut?

Since the Reserve Bank of Australia (RBA) lowered the cash rate at the May meeting, softer CPI inflation in May has opened the door for further monetary easing (Chart 1). The important question is whether the RBA could be comfortable to ease in July, which would result in cutting for two consecutive meetings.The reality is that the labor market continued to remain tight. While the participation rate was elevated close to a historical level of 67.0% in May, the unemployment rate slightly fell from 4.07% in April to 4.06% in May, which is below the natural rate (Chart 2). In fact, wage pressure hasn’t really subsided with nominal wages rising from +3.2% YoY in Q4-24 to +3.4% YoY in Q1-25.What is even more, the fiscal policy will turn expansionary under the tight labor market. Labor government’s initiatives to lower the cost-of-living such as electricity rebates and personal income tax cut could bring renewed inflationary pressure. This could complicate RBA’s future policy decisions.Still, as retail sales have remained relatively subdued by merely increasing by +0.2% MoM in May, softer inflation could arguably support the RBA to initiate a front-loaded rate cut at the July meeting. However, this could further stimulate the housing market, where home values already picked up by +0.6% MoM for two consecutive months in June.For these reasons, the Reserve Bank would probably prefer to see the results of the more comprehensive Q2-25 CPI report to be released on July 30th before easing in August, as the monthly CPI inflation has been volatile since the May meeting. In fact, inflation picked up in April before softening in May (Chart 2). Hence, without focusing on one month result, the RBA is likely to remain on hold in July at the margin, as the labor market holding up well.