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The Reserve Bank reduced its cash rate target from 4.10 per cent to 3.85 per cent yesterday (20 May), following a hold at its 1 April meeting.
In a statement from the board following its decision, the RBA reiterated that “the outlook remains uncertain” as the global economy struggles with continued volatility.
Attending the press conference, Broker Daily asked RBA governor Michele Bullock whether the board was worried about more borrowers taking on more debt, seeing as the economic environment is still uncertain.
“That's something that, from a financial stability perspective, we always are interested in. At the moment, at an aggregate level, households are in a pretty good position. That's not to say there's not people out there who under stress. There are. But loan devaluation ratios aren't too high,” said Bullock.
“Generally, people are meeting their repayments. And in fact, some people are more than meeting their repayments. They're paying their loans off more quickly. So, our judgment at the moment is that there's not a financial stability risk associated with this, and with interest rates coming down, provided there's not a lot more risky lending, this actually will help households. It will actually reduce the extent to which households are under stress, and that'll be good for financial stability.”
“Uncertainty” and “volatility” – the buzzwords that have dominated 2025 are continuing to influence the economy as the RBA passed along rate cuts for the second time this year.
Since the 2022 peaks, inflation has fallen dramatically, placing annual trimmed mean inflation at 2.9 per cent, below the RBA’s coveted 3 per cent mark for the first time since 2021.
Meanwhile, headline inflation sits at 2.4 per cent, also below the mark.
This spurred the decision to cut rates. However, the 25-bp cut was more modest than some early predictions, penning a 35 and even 50-bp drop.
“While recent announcements on tariffs have resulted in a rebound in financial market prices, there is still considerable uncertainty about the final scope of the tariffs and policy responses in other countries,” said the RBA.
“Geopolitical uncertainties also remain pronounced. These developments are expected to have an adverse effect on global economic activity, particularly if households and firms delay expenditure pending greater clarity on the outlook. This has also contributed to a weaker outlook for growth, employment and inflation in Australia. That said, world trade policy is changing rapidly, thereby making the central forecasts subject to considerable uncertainty.”
Despite this, there were positive signs in the local economy, such as improved household incomes and an easing in financial stress.
Employment is also on the rise and underemployment is low. However, the central bank said that the labour market remains tight, creating challenges for employers. This has resulted in stagnated productivity growth.
The board said that inflation risks have balanced out, with inflation now within the target range and upside risks easing due to global economic pressures.
With inflation expected to remain near target, it said a modest policy easing was appropriate, slightly reducing restrictiveness while maintaining caution amid demand and supply uncertainties.
Policy remains well-positioned to respond decisively if global developments significantly impact Australia’s economy.
Future decisions will be data-driven, focusing on global conditions, domestic demand, and inflation and labour market trends.
The next meeting is slated for 7–8 July. Uncertainty and volatility are likely to continue to dominate outcomes.
[Related: RBA hands down May cash rate decision]
