Commonwealth Bank (CBA) is now expecting the Reserve Bank of Australia (RBA) to slash rates at its July meeting thanks to easing inflation.
The Australian Bureau of Statistics (ABS) released its monthly consumer price index (CPI) on Wednesday, showing that inflation continues to cool nationwide. For the 12 months leading up to May, inflation rose just 2.1%, down from April's growth rate of 2.4%, year-over-year. The results are within the RBA's target inflationary range of 2% to 3%. Meanwhile, the annual mean inflationary rate – which strips out volatile items like automotive fuel and electricity – grew 2.4% in May, compared with April's reading of 2.8%.
The latest results have prompted CBA to revise its rate cut forecast, bringing expectations forward by a month. Instead of a single cut in August, the bank now sees back-to-back 25 basis point reductions in July and August, bringing the official cash rate (OCR) down from 3.85% to 3.35%, over two meetings.
"The RBA cutting the cash rate in July is now the most likely outcome," said Harry Ottley, an economist at CBA. He noted that the Q2 quarterly CPI data – widely seen by economists as a more accurate gauge of inflation – "is likely to remain benign."
Belina Allen, senior economist at CBA, added that the RBA's "dovish" approach at its May meeting and the nation's low unemployment rates – currently at 4.1% – make a July rate cut all the more likely.
"There is enough evidence for the RBA that the disinflation pulse in the economy should continue," she said, but acknowledged that the decision will be a close one.
"A wild card, of course, is the uncertain global environment," Allen said, pointing to tariff talk and Middle East tensions as potential spoilers.
"We expect there to be a discussion of both leaving the cash rate on hold and cutting it by 25 basis points," she 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 [the RBA] wanting to see a full quarterly CPI print. We expect though a 25 basis point cut will make the stronger argument."
Allen added that a further cut later in 2025 or early 2026 remains on the table, especially if growth shifts from public to private demand and inflation risks undershoot the midpoint of the RBA’s band.
A rate cut would be welcome relief for mortgage holders and investors alike, many of whom have been feeling the pinch from soaring living costs, higher borrowing rates, surging property prices and a housing supply shortage.
May’s CPI data offered a wider snapshot of which sectors are driving inflation – and which are finally cooling off.
In the case of housing, inflation rose just 2%, compared with the 2.2% rise in April. Rents, meanwhile, increased 4.5% in the 12 month lead up to May, down from a 5% increase in April. In monthly terms, that equals a 0.3% rise in rental prices.
"This is the lowest annual growth in rental prices since December 2022, consistent with smaller increases in advertised rents and stable vacancy rates across most capital cities," the ABS said in a statement.
And the surprise bump in new dwelling prices – covering new builds and major renovations – didn't stick. Prices rose just 0.8% in May, down from 1.2% in the year to April, marking the slowest annual growth since April 2021. Builder discounts and promo deals aimed at attracting new business helped keep a lid on costs.
"We expect rent inflation to continue to ease going forward as population growth normalises and the rental market rebalances," Ottley said.
Meanwhile, tobacco and education kept climbing, with prices up 11.5% and 5.7% in May, respectively.
On Thursday, Westpac echoed the shift, stating in a note that it now expects the next rate cut in July, revising its earlier forecast of August.
"The May monthly CPI indicator came in below even the low number that we expected," said Luci Ellis, chief economist at the Westpac Group. "That helps bring forward inflation’s return to the 2.5% target midpoint and keep it there, which is what the RBA is trying to achieve."
The economist added that the major anticipates three more rate reductions after the expected July cut, bringing the rate down to 2.85%. Although she added the exact timing of additional cuts will depend on the RBA's "post-meeting tone."
National Australia Bank (NAB) has previous said it expects a rate reduction at the July meeting.
ANZ is standing firm in its prediction that the RBA will hold rates at the upcoming meeting, with a 25 basis point cut expected in August instead, economist Madeline Dunk told Australian Broker.
Dunk noted that "The RBA Governor [Michele Bullock] has previously noted the RBA prefers to focus on the quarterly, rather than the monthly, CPI [data]."
The RBA's next meeting on monetary policy is scheduled for July 7-8.
