RBA cut expected, but then what?

The Reserve Bank of Australia (RBA) is expected to cut interest rates when it meets next week by 25 basis points, bringing the official cash rate down to 3.85%.

However, Commonwealth Bank (CBA) head of Australian economics Gareth Aird said he is not expecting any forward guidance from the central bank.

"We expect the RBA to leave the door ajar for a follow-up July rate cut simply by not providing any forward guidance," Aird said.

"We continue to look for an end year cash rate of 3.35% and our base case has the RBA cutting the cash rate by 25bp in May, August and November."

Aird said the current state of the global economy is too uncertain at this stage for the RBA to feel confident to hint at more cuts.

"US trade policy has been erratic. And this has led to significant uncertainty around the global economic outlook," Aird said.

"The RBA will have the opportunity to opine on the global trade situation next week. Indeed, we expect RBA communication to emphasise that developments in the global economy have deteriorated since the April board meeting despite some better news on US and Chinese trade policy earlier this week.

"Notwithstanding, at this juncture we think the board will continue to put more weight on the domestic flow of data rather than international developments in the monetary policy setting process."

Zenith head of asset allocation Damien Hennessy agrees that while the situation with the US has caused uncertainty, Australia has weathered the storm thus far, and the RBA is likely to put more emphasis on domestic indicators.

"The macroeconomic picture will continue to dominate, and the events of the past month have reminded us that the environment that we are in now, geopolitical risk and policy risk is a key feature," Hennessy said.

"Coming into this, it looked as if the US was very close to achieving its soft landing, but what I expect to see over the next three months are signs that the US economy is slowing."

Hennessy added that markets are now pricing in a 20% to 30% recession probability - which is down from about 50% to 60% a few months ago.

"To me, markets are becoming a bit complacent to some of the downside risks that we still see out there," he said.

"What's interesting is that Australia seems to be immune from this - our market ended up in April - and so the Australian economy seems to be improving off a low base. So, although I expect to see the RBA cut rates, there may be only two moves over 2025."