Westpac chief economist Luci Ellis (pictured) said the Reserve Bank (RBA) is unlikely to rush into rate cuts, but the case for further easing is strengthening.
“We have retained our current expectations for the near-term path for the RBA cash rate: a 25bp cut in August – not July – and another in November,” Ellis said.
“We have added two more 25bp cuts in early 2026 (February and May), though they could be earlier… if inflation and the labour market turn out weaker late in 2025 than we currently expect.”
The Australian economy slowed sharply in the March quarter, growing just 0.2% and 1.3% annually — one of the weakest results since the early 1990s, excluding the COVID period. April’s Monthly CPI rose 0.8%, well above Westpac’s 0.3% forecast, prompting a revised June quarter CPI estimate of 1% and trimmed mean of 0.8%, indicating short-term inflation risks.
Ellis forecast the cash rate would bottom out at 2.85%, down from its current 3.85%, describing this as “at the lower end of the ‘neutral range’.”
Board remains cautious
Despite weaker GDP data and easing inflation, Ellis said the RBA board is signalling it will “move cautiously and predictably.”
“This is code for not wanting to do back-to-back cuts,” she said. “It also made it clear… this was about reducing restrictiveness, not moving quickly back to neutral in the style of the Federal Reserve last year.”
Upcoming labour force and inflation data were unlikely to shift the near-term outlook, she added.
Underlying inflation and housing costs in focus
Ellis said recent data shows population growth is slowing, which could ease pressure on rents and housing costs, contributing to softer underlying inflation.
“These and other shifts are enough to take trimmed mean inflation below the midpoint of the target range for a time, starting around the end of this year,” she said.
Ellis warned that without further easing, the RBA could face a “shaky handover” from public to private sector demand, dragging on growth and employment.
Wage growth and productivity pose risks
While unemployment remains low, Ellis said wage growth is still underwhelming.
“The result is likely to be soggy growth and surprisingly weak wages growth… despite the RBA’s beliefs about the implications of below-par measured productivity growth,” she said.
Ellis said any changes to RBA’s Statement on the Conduct of Monetary Policy could clarify how closely the central bank should target the 2.5% inflation midpoint.
Source: brokernews.com.au