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According to Judo Bank’s chief economic adviser Warren Hogan and economist Matthew De Pasquale, the financial market is now fully priced for a rate cut in May and expects a terminal rate of around 3 per cent by early 2026.
The latest tariff developments and concerns about an economic slowdown have spurred the market to price in an additional 25-bp cut to the current cutting cycle, with some even predicting a 50-bp reduction in May.
As of 7 April 2025, the ASX RBA Rate Tracker has shown market expectations at a 96 per cent chance of a 50 bp reduction, to bring the cash rate down to 3.6 per cent.
However, the market’s expectations for rate cuts will remain volatile in the coming weeks due to ongoing geopolitical tensions, particularly as tariff news continues to emerge, according to Hogan and Pasquale.
Meanwhile, the Reserve Bank of New Zealand is set to meet post-tariff announcements, with a rate cut expected later this week, further influencing global market sentiment.
The Reserve Bank of Australia (RBA) held the cash rate at 4.1 per cent during its April meeting, aligning with market expectations.
“The RBA flagged that uncertainty is high and that there is risk on both the upside and the downside,” they said.
“The RBA will be surprised by the magnitude of the financial market reaction to the tariffs but has time on its side to watch how developments play out.
“Central banks need to tread carefully here.”
Hogan and De Pasquale emphasised this call to caution, despite calls for emergency rate cuts or other measures to support weakened markets.
“Unless the market fallout jeopardises the underlying economy, central banks need to be mindful of bailing out investors, particularly as inflation is lurking in the economy and is a direct consequence of tariffs,” they said.
Unless the market fallout threatens the broader economy, the RBA and other central banks must remain focused on controlling inflation rather than reacting hastily to financial market turbulence, they said.
According to Judo Bank’s duo, the RBA currently has a buffer of 50–75 bps of rate cuts at its disposal, which would return monetary policy to a neutral stance.
The Australian dollar is likely to act as a shock absorber for the economy, but the RBA also retains the option to provide further interest rate support if necessary.
Given Australia’s position as a net beneficiary of tariffs – with a baseline tariff rate of 10 per cent compared to higher rates for many other nations – the full effects on Australian export markets are still uncertain.
As Hogan and De Pasquale said, the RBA will need to proceed with caution, as the global inflationary shock triggered by US tariff policies could have lasting economic consequences.
NAB’s chief economist Sally Auld said that the major bank expects 25 bps of easing in the May meeting, along with a further 75 bps of easing through to February next year.
“The May easing is likely to be conditioned on a better-than-expected print for the RBA on Q1 inflation and a shift in the distribution of risks to domestic and global economic growth,” Auld said.
“Beyond May, further rate cuts are premised on a view that a return to a more neutral policy setting is an appropriate first step, given recent developments.
“We see risks to our RBA profile as tilted to the downside, acknowledging the risk that RBA may need to take policy settings to an expansionary footing.”
[RELATED: Tariffs prompt cash rate forecast change]
