The minutes for the May 2025 RBA Monetary Policy Board meeting and speech by Assistant Governor Hunter reveal that the RBA is not panicking about the world and recognises the domestic case for policy normalisation, not expansion.
The policy and market volatility since the 2 April ‘Liberation Day’ tariff announcements has all happened since the April RBA meeting. Accordingly, the section of the minutes on financial conditions indicates that the Board received an extensive briefing on these developments. The initial sell-offs and deteriorations in liquidity, both globally and in Australia, had mostly retraced by the time of the May meeting. However, the Board expressed some scepticism about the extent of the rebound, particularly insofar as it relied on stimulatory fiscal or monetary policy globally or deregulation in the US. It sounded a note of scepticism about the US more broadly, highlighting that the US’s poor fiscal position might be contributing to higher term premia. It also noted that reallocation of global investors’ previously overweight US exposures might be weighing on the US dollar. The minutes highlighted that the US dollar depreciation runs against the expected pattern where lower imports induce an appreciation of a tariffing country’s exchange rate.
The Minutes also noted that market pricing on policy rates had initially reacted more sharply to tariff news in Australia than in some peer economies. While some of this might have been a separate reaction to domestic data, some market participants may have viewed Australia as being particularly vulnerable, because of our close economic linkages with China. By contrast, the Board views China as being well placed to withstand the tariff turmoil and maintain growth. The minutes noted that the Chinese authorities ‘authorities there appeared to be both committed to their growth target of around 5 per cent and able to provide more stimulus to the economy if required.’
Turning to the domestic economy, the Minutes highlighted that growth, inflation and the labour market were all evolving broadly as expected. They also noted that the Board ‘welcomed’ the broad-based easing in underlying inflation. These outcomes provided ‘welcome confirmation’ that upside inflationary risks had not crystallised. Contrary to the Governor’s comments in the media conference downplaying the use of shorter-run calculations, the minutes highlighted that on a six-month-annualised basis, trimmed mean inflation was in the middle of the RBA’s 2–3% target range.
The domestic growth outlook was scaled back a little, both because of weaker global demand for Australian exports and some possible uncertainty effects weighing on domestic investment; today’s speech by RBA Assistant Governor Sarah Hunter also touched on these potential uncertainty effects. A lower cash rate assumption offset these external effects to some extent.
Given these developments, the staff forecasts were characterised similarly to the post-meeting communication, with underlying inflation now expected to be around the midpoint of the target range. For a 0.1ppt revision to the forecast relative to the February round, this is a significant change in language. The determination to get exactly to 2.5% declared in the wake of the February meeting, to maximise the chance of being in the target range, was nowhere to be seen in any of the communication after the May meeting.
The minutes also noted comments that wages growth might ‘slow more noticeably than currently forecast’. Although the staff assessment remains that the labour market is tighter than full employment, the minutes again suggested not all Board members were convinced. Members noted signs of easing pressure, such as a greater focus on job security in bargaining agreements. Subsequent to the RBA meeting, the Fair Work Commission (FWC)
handed down its 2025 National Wage Case decision. As Westpac Senior Economist Justin Smirk notes in his commentary on the decision, the 3.5% increase to minimum and award wages is consistent with our forecast moderation in overall wages growth.
The FWC emphasised that slow growth in labour productivity was mostly an outworking of the expansion in the care economy. We have been highlighting this for some time (see here, here and here). It is a multi-decade trend as well as reflecting the more recent ramp-up in the NDIS. Some drag on economy-wide measures of productivity might therefore be expected to continue. Importantly, though, this will have almost no implications for labour costs in the sectors where rising labour costs might actually influence prices and so inflation, such as business services. The RBA has increasingly recognised this over the past year. The minutes did note that productivity growth has yet to pick up and that this is a potential upside risk to inflation. However, this is a far cry from the comments in the August 2024 minutes about ‘the need for productivity growth to recover in order to help reduce growth in unit labour costs.’
Turning to the policy decision, as in the post-meeting media conference, there is a hint in the minutes that the staff went to the meeting with either an open recommendation, or at least a weaker steer than a specific recommendation would normally imply.
The Board clearly considered the case for a hold. This case rests on a view that domestic labour and product markets are still tight and policy not that restrictive. Tactical considerations also entered into the debate, including an argument to ‘wait and see’ given the current uncertainty. The minutes also cited concerns about near-term fluctuations in headline inflation. Note that this argument runs counter to a more standard view that monetary policy should focus on keeping inflation sustainably inside the target range.
Having dismissed the case to hold, the Board acknowledged that ‘trends in domestic conditions could, on their own, justify some degree of reduction in the cash rate target at this meeting.’ It was therefore ‘no longer necessary to be as restrictive’. This was a point we noted in our discussion at the time of the meeting, though it came out less clearly in the post-meeting RBA communication; for example, the Overview of the Statement on Monetary Policy concluded ‘that it was appropriate to ease monetary policy at this meeting. The Board nevertheless remains cautious about the outlook’.
Developments overseas strengthened the case for a rate cut. As we noted post-meeting, the RBA now views the tariffs and broader trade dispute as being more likely to reduce inflation than add to it. This is a shift from the more equivocal language in April, that ‘the implications for inflation would be more complicated’.
The minutes record a fairly open discussion about the appropriate size of the cut. The case for a larger-sized 50bp cut rested on the idea that the downside risks were large enough that some of the future easing path should be front-loaded. Given the Board’s views of the impact on the Australian economy – and especially its views on China – this argument was unlikely to resonate with members. The minutes were also clear that the Board would not want to give the impression that a large cut now meant a larger overall easing phase and lower landing point. As we argued ahead of the meeting, it was a bridge too far to expect the RBA’s thinking to pivot all the way from hawkish cut in February to going hard in May. Consistent with the circumspect reaction we identified then, the Minutes expressed a preference for moving ‘cautiously and predictably’. It also noted members’ judgement that ‘it was not yet time to move monetary policy to an expansionary stance’. This raises the question of where ‘neutral’ is, but for now we expect that the Board will tread carefully from here, given the uncertainties involved in assessing this.
Our read of the RBA’s recent communication remains that it will not rush further cuts. In particular, we expect that it is not looking to follow up the May cut with one at the July meeting. August remains the most likely date for the next cut.
