Bendigo Bank's May Economic Update

Key takeaways:

• Inflation moderates, growth and jobs now the RBA’s top concerns
• May cash rate all but certain - but by how much?
• Trump’s tariffs prompt ‘extreme volatility’ in financial markets
• Slowdown expected for world’s two largest economies

Bendigo Bank’s Chief Economist David Robertson outlines in his latest economic update why growth and jobs will be the key drivers for the RBA’s cash rate decisions through 2025 in light of the latest inflation figures.

Global turbulence stems local inflation

The uncertain global backdrop and lower growth expectations have served to limit upside risks to inflation, with the RBA’s preferred measure of underlying inflation falling to 2.9% in the March quarter.

“Fortunately, unlike the US which faces stagflation due to its tariffs, our inflation outlook appears much more benign than previously forecast,” Mr Robertson said.

“The trimmed mean - the Reserve Bank’s preferred measure of underlying inflation - is expected to settle between 2.5% and 2.75% and to stay there.”

So after three years of having a laser sharp focus on inflation, the primary focus for the RBA is now rapidly shifting, Mr Robertson said.

“The RBA has been dealing with global inflation shock for three years but its concerns are quickly moving from price stability and inflation to protecting growth and jobs.”

All eyes on May for next cash rate cut – but by how much?

May looks set for the next cash rate cut, but questions remain over just how deep the cut will be.

“The next cut is almost certain for May 20, but of what magnitude?” Mr Robertson said.

“We have four more cuts, including May, in our forecasts taking the rate down to around 3.1%, a drop of 25 basis points per quarter.

“Meanwhile, the markets are now factoring in five rate cuts to around a 2.8% level by year end. It’s a deeper path than previously expected.”

The RBA can ease rates quickly if global conditions suddenly worsen, Mr Robertson noted, but this is an unlikely course of action for the moment.

“A larger 50 basis point cut in May is most unlikely unless markets become dislocated like in the GFC, which isn’t currently visible, but a 35 basis point cut from the RBA in May would round out the cash rate to more convenient fractions.”

Financial markets face extreme volatility

Volatility on financial markets remains extreme, despite the latest exemptions and deferrals of the US Government’s tariffs, Mr Robertson said.

“Equity markets have been clawing back some of their losses but there are still difficult times ahead.

“Tariffs are generally bad for everyone but especially problematic for the country imposing them. So with the escalation between the US and China - the world’s two largest economies - it’s a question of just how much slower these economies will be growing this year and next.”

The International Monetary Fund (IMF) now forecasts US growth will reduce by a third to 1.8% this year, and China’s GDP growth is projected at 4% (down from 4.6%).

Mr Robertson notes these forecasts may be a ‘best-case scenario’ given how challenging any negotiations are likely to be.

And while it has some cushioning, Australia is not immune from the tariff turbulence, with local growth rates also downgraded.

“The IMF has downgraded Australia’s expected growth rate from 2.1% to 1.6%, and similarly we have reduced our forecast growth rate from 2.4% to 2% in 2025, given the lower global growth profile ahead,” Mr Robertson said.

Australia - and its trading partners - better placed than many to weather the storm

While consumer and business confidence has been impacted by global factors and uncertainty ahead of the federal election, Mr Robertson said Australia remains relatively well positioned.

“Australia’s lower exposure to tariffs than our peers, and lower interest rates ahead, should see a rebound in consumer sentiment later in the year, with outperformance in our region,” Mr Robertson said.

“Challenging, uncertain global conditions will likely persist, but our major trading partners may weather the storm better than elsewhere.”

Watch David Robertson’s May Economic Update.