The Reserve Bank of Australia lowered its main policy rate, the cash rate, by 25 basis points from 4.10 percent to 3.85 percent at its meeting today, in line with the consensus forecast. This rate was left on hold at the RBA's previous meeting in April after it was cut for the first time since 2020 in February. The rate decision coincided with the publication of updated economic forecasts in the quarterly Statement on Monetary Policy.

In the statement accompanying today's decision, official noted recent declines in inflation and expressed optimism that risks to the inflation outlook had become more balanced after they were more concerned previously about upside risks. This, they judge, provides more confidence that inflation will be around the midpoint of their target range of 2 percent to 3 percent throughout much of the forecast period. However, despite ongoing tightness in the labour market, officials remain uncertain about growth prospects, reflecting both external risks and the outlook for domestic household consumption.

Reflecting these considerations, officials concluded that a rate cut was warranted today but they also stressed that the remain cautious about the outlook. They noted that monetary policy is well placed for them to respond decisively if external factors weigh on domestic economic conditions.

Today's decision that a rate cut is warranted reflects the fact that officials have revised their near-term inflation forecasts lower. Headline inflation is now forecast to be 3.0 percent at end-2025, down from the previous forecast of 3.7 percent made in February, and then remain steady at 3.1 percent at mid-2026 and 2.8 percent at end-2026, little changed from the previous forecasts of 3.2 percent and 2.8 percent respectively. The forecast for the trimmed mean measure of inflation at end-2026 has also been revised slightly lower from 2.7 percent to 2.6 percent. Both measures of inflation are forecast to be at 2.6 percent mid-2027, down from 2.7 percent previously.

Officials have also revised down their growth forecasts. Australia's economy is now forecast to expand by 2.1 percent on the year in the three months to December 2025, down from 2.4 percent previously, and by 2.2 percent in the three months to March 2026, down from 2.3 percent previously.

In the post-meeting press conference, Governor Michele Bullock confirmed that officials had briefly considered keeping rates on hold again at this meeting but had then debated between cutting policy rates by 25 or 50 basis points. Although she was non-committal about the potential for a series of rate cuts in upcoming meetings, she stressed that officials now have more scope to respond to incoming data, suggesting officials are now more open to cutting rates further if conditions allow.

With elections past, forecasters look for a big 50 basis point cut after the RBA played it safe with no action in April even as the economy weakened. More rate cuts are expected this year.

The Reserve bank of Australia (RBA) announces its monetary policy with regard to interest rates on the first Tuesday of each month with the exception of January when it is on vacation. The RBA is the central bank of Australia and its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system.

The Reserve Bank of Australia's (RBA's) main responsibility is monetary policy. Policy decisions are made by the Reserve Bank Board with the objective of achieving low and stable inflation over the medium term. Other responsibilities include maintaining financial system stability, while at the same time promoting the safety and efficiency of the payments system. The RBA regards appropriate monetary policy as a major factor contributing to the Australian dollar's stability, which in turn leads to full employment and the economic prosperity for Australia.

The RBA is unique among the central banks - it has two boards with complementary responsibilities. The Reserve Bank Board is responsible for monetary policy and overall financial system stability. The Payments System Board has specific responsibility for the safety and efficiency of the payments system.

The RBA sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.