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Hopes of jumbo RBA rate cut in May tempered by strong jobs data
Both economists and money markets have scaled back expectations of a jumbo rate cut in May.
Economists are now reconsidering their interest rate forecasts after fresh data from the Australian Bureau of Statistics (ABS) painted a picture of an exceptionally strong labour market – one seemingly unaffected by global developments.
Namely, the unemployment rate held steady at 4.1 per cent in March, alongside a sharp rise in employment, with 32,000 people entering the workforce, and only 3,000 leaving.
This is compared to 53,000 people leaving work last month.
Employment has grown by 308,000 people, or 2.2 per cent, over the last 12 months. This annual growth rate is slightly higher than the 20-year pre-pandemic average of 2.0 per cent.
Sean Crick, ABS head of labour statistics, said: “The employment-to-population ratio remained at 64.1 per cent in March, while the participation rate increased slightly to 66.8 per cent.”
Commenting on these figures on Thursday afternoon, HSBC’s Paul Bloxham said: “There would be nothing in this report to suggest the jobs market would be a reason why the RBA should be cutting its cash rate further.”
However, given the data reflects a period preceding Trump’s Liberation Day, Bloxham still expects the central bank to cut by 25 bp in May and by another 75 bp by Q1 2026, taking the cash rate to 3.10 per cent by early 2026.
“Local events are being overtaken by global ones,” he said.
“We see the global slowdown as likely to be disinflationary and expect that Australia will also see lower imported goods prices due to trade diversion … This disinflationary effect should allow the RBA to cut its cash rate further, despite the economy operating at close to full employment and many domestic price pressures persisting.”
Similarly, ANZ retained its view that the central bank will cut by 25 bp in May but noted that the likelihood of a 50 bp cut had been reduced by “the steadiness in the labour market”.
Nevertheless, the big four bank still expects further easing in July and August, bringing the cash rate to 3.35 per cent.
In AMP’s view, Thursday’s jobs data is “the perfect set-up for the RBA” – lower inflation but the labour market holding up.
As such, its deputy chief economist, Diana Mousina, said: “We see another 0.25 per cent rate cut in May … And then we expect another 0.25 per cent cut in August.”
“Our view has not changed since the new US tariff announcements because the impact on Australia is unclear,” Mousina added. “There is certainly no need for the RBA to press the panic button right now with a large interest rate cut at the next board meeting.”
CBA’s Gareth Aird has maintained his forecast for a 25 bp rate cut next month, though his prediction depends on the trimmed mean consumer price index (CPI) aligning with the RBA’s implied quarterly forecast of 0.7 per cent.
“We do not expect the RBA to deliver an outsized 50 bp rate decrease in May,” Aird said.
“It would likely require a trimmed mean CPI of 0.5 per cent/quarter in Q1 25 and a meaningful lift in unemployment in April for a 50 bp cut to even be on the table at the May board meeting.”
While, at this stage, CBA continues to favour an end-year cash rate of 3.35 per cent, Aird said the “fluidity and uncertainty” around tariff announcements mean that the global economic backdrop is “impossible” to forecast with clarity.
“Following the federal election and more policy certainty around the domestic fiscal outlook, we will revisit our economic forecasts and base case for the expected path of the cash rate,” he added.
Conversely, Dwyfor Evans, head of APAC macro strategy at State Street Markets, said the combination of a low jobless rate and a tighter labour force signals a lower commitment from the central bank towards further monetary accommodation.
“Headwinds are on the horizon centred on the trade impact and weaker growth prospects, but labour market data remains solid for now,” he said.
VanEck’s head of investments and capital markets, Russel Chesler, partly agreed, noting that the continued resilience in Australia’s jobs market over the last three years demonstrates that “purely on this data, there is little urgency for the RBA to accelerate its rate cut timelines”.
Despite acknowledging that the data mostly predates Trump’s latest round of tariff announcements, Chesler said: “I would not be surprised if the RBA kept the cash rate at its current 4.1 per cent at the May 2025 meeting.”
“No one knows what the final tariffs will be nor the impact, in our view, a more realistic rate cut scenario for Australia would be two or maybe three cuts this year,” he added.
Money markets are currently pricing in a standard 25 basis point cut at the 20 May meeting, with the probability of a jumbo cut sitting at just 27 per cent.
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