Key insights from the week that was.
As widely expected, the RBA delivered a 25bp rate cut on Tuesday, bringing the cash rate to 3.85%. In contrast to the relatively hawkish cut of February, the latest move was framed as a “confident cut” by Governor Bullock – recognition that inflation has since been confirmed in the target band and, on an underlying basis, is “expected to be around the midpoint” through to June 2027.
Further justifying the shift in tone in the RBA’s post-meeting communications was the change in the balance of risks since February. On the domestic front, the Board note that “the pick-up [in household consumption] will be a little slower than was expected three months ago”, a trend evident in card activity data for some time; although, lingering labour market tightness continues to limit their concern over the activity outlook. Offshore, the growth outlook is abnormally uncertain, and the RBA recognises this could contribute “to a weaker outlook for growth, employment and inflation in Australia”.
As discussed by Chief Economist Luci Ellis in a video update midweek, Governor Bullock stated that the domestic factors – lower inflation and downside risks to consumption – were enough to warrant May’s rate cut, but that the global backdrop strengthened the case further. That the Board considered a 50bp rate cut emphasises policy makers are willing to deliver further relief if/when the data and risks warrant. If the labour market remains in robust health and global risks do not crystalise, a 25bp cut in August and November seems the most probable path for policy, bringing the cash rate to a broadly neutral 3.35% by year end.
Offshore, it was a quiet week on the data front.
China’s April data round was on the soft side. Retail sales growth rose to only 4.7%ytd against the market’s expectation of a 5.0%ytd gain. Growth by sub-component was variable but broad based – only petroleum and autos went backwards over the past year, and arguably only as a result of price declines. Fixed asset investment was also sub-par (4.0% ytd) and heavily concentrated amongst state-backed firms – private investment essentially unchanged from 2024 (0.2%ytd). Industrial production meanwhile showed continued strength (6.4% ytd), led by growth in semiconductors and electric vehicles.
Continuing the steady flow of policy support, Chinese authorities this week cut the 1-year and 5-year Loan Prime Rates by 10bps to 3.0% and 3.5% respectively having already lowered the Reserve Requirement Ratio early in the month. Authorities remain committed to their 5.0% growth target for 2025, but are likely to wait and see the outcomes of trade negotiations with the US before deciding the next steps for stimulus. The 90-day truce with the US will provide additional near-term support for GDP growth, keeping the growth target within reach without aggressive stimulus.
Further afield, April CPI readings showed a re-acceleration in inflation in the UK and Canada. Annual UK headline inflation rose to 3.5%yr in April, the first reading above 3.0% since March 2024. Energy prices were the main driver as subsidies roll off. Transport (3.3%yr) and recreation & culture (3.1% yr) also contributed meaningfully. Abstracting from food and energy, core inflation rose to 3.8%yr in April from 3.4%yr in March.
In Canada meanwhile, headline inflation eased to 1.7%yr, largely due to falling gasoline prices after the removal of the consumer carbon tax on April 1. However, trimmed mean core inflation rose from 2.8%yr to 3.1%yr, surprising market participants.
For these nations’ central banks, balancing upside inflation risks and growth concerns will remain a challenge. With limited fiscal capacity and monetary policy still restrictive, the Bank of England is likely to prioritise growth over inflation in the near term. In contrast, with greater fiscal flexibility and accommodative monetary policy, the Bank of Canada is expected to remain more focused on inflation expectations and risks. In its last statement, the BoC alluded to this noting “Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.”
As a final note, overnight President Trump’s tax bill passed the House in a 215-214 vote after a week of negotiations. Passage through the Senate is likely to prove much more challenging and may also see changes to the bill that are unpalatable for the House. The administration still has 7 months to pass the bill through Congress before the temporary tax cuts currently in effect lapse. However, the debt ceiling, which the current bill also looks to address, will become a binding constraint again in August or September. More broadly, every week that slips past debating these issues is one less the Administration and the House majority has to craft and debate the deregulation initiatives financial markets expect from this Administration. If such measures are not forthcoming, an additional risk to medium-term US growth prospects may be priced by markets.
