Australia: Pencilling in a rate cut by RBA in May – Standard Chartered

Q1 trimmed mean CPI fell into the RBA’s 2-3% target range for the first time since end-2021. The growth/stability trade-off likely favours more RBA cuts amid growth headwinds posed by US tariffs. Markets pencil an additional 25bps cut at the May RBA meeting, having expected a pause previously and lower their terminal rate projection for the RBA to 3.60% by Q3-2025 (3.85% previously), Standard Chartered's economist Nicholas Chia reports.

A growth-stability backdrop that favours more cuts

"Australia’s Q1 CPI was a mixed bag. Headline inflation rose 2.4% y/y, versus our estimate of a 2.2% increase (Bloomberg: 2.3%). Trimmed mean CPI, the Reserve Bank of Australia’s (RBA’s) preferred measure of underlying inflation, grew 2.9% y/y, in line with our forecast (Bloomberg: 2.8%). This is the first time since Q4-2021 that trimmed mean CPI has fallen within the RBA’s 2-3% target (Figure 1). Services inflation also eased (+3.7%) on lower rent and insurance costs, while goods inflation rose (+1.3%) on higher food and electricity prices."

"All in, we think the RBA can take comfort from the broad-based easing of price pressures via the trimmed mean measure; it is forecasting terminal trimmed mean CPI of 2.7% from Q2, based on the then-market implied rate path in February. We now pencil an additional 25bps cut in Q2 at the 20 May RBA meeting, having previously expected the RBA to keep rates on pause until Q3."

"We therefore lower our terminal RBA policy rate to 3.60% by Q3 (3.85% previously). We do not preclude a cut in Q4, but much hinges on trade talks and whether the US dials back its tariff agenda. We expect the RBA to frame policy accommodation in May as a pre-emptive cut to mitigate the impact of the sharp rise in trade tensions on economic growth. There is one more labour market report due in May as well as the Q1 wage print prior to the May RBA meeting, but we think the bar to deter the central bank from easing is higher now given the considerable headwinds to economic growth."