Australia Cuts Interest Rate to Two-Year Low as Inflation Slows

The Reserve Bank of Australia (RBA) has cut its benchmark interest rate by 25 basis points to 3.85%, the lowest level since May 2023. The decision, announced on Tuesday, comes as inflation continues to ease across the country.

Australia’s annual inflation rate fell to 2.4% in the first quarter of 2025, the lowest in four years and now within the RBA’s target range of 2% to 3%. With price pressures subsiding, the central bank took the opportunity to ease monetary policy to support economic activity.

The RBA has emphasized in previous statements that bringing inflation back within its target range is a top priority. However, the bank has also acknowledged the growing uncertainty in the domestic and global economic environment.

Recent economic data showed that the Australian economy grew by 1.3% year-on-year in the final quarter of 2024. This marked the first expansion since the third quarter of 2023. Despite this improvement, economists remain cautious about the outlook.

Analysts have pointed to risks arising from global trade tensions, especially following the temporary implementation of new U.S. tariffs under President Donald Trump’s "Liberation Day" policy. Though those tariffs have since been suspended, they contributed to volatility in global markets and raised concerns about their long-term impact on countries like Australia.

A research note from HSBC published on May 16 warned that weaker global growth and shifts in trade patterns may bring modest negative effects to Australia’s economy. The note also suggested that Chinese manufactured goods could increasingly be diverted to markets like Australia, adding further pressure on domestic producers.

Carl Ang, a fixed income analyst at MFS Investment Management, echoed similar concerns in a note dated May 15. He indicated that growing uncertainty could lead to more interest rate cuts ahead, possibly bringing the RBA’s policy rate down to 3.1% by early 2026.

Governor Michele Bullock, speaking after the decision, reiterated the RBA’s commitment to managing inflation within target, while also supporting the economy through uncertain times. She said the bank would continue to watch economic data closely before making any further adjustments to interest rates.

The next RBA policy meeting is scheduled for July. Until then, investors, businesses, and consumers will be watching key indicators to gauge the central bank’s next move.