Inflation data points towards another rate cut

INFLATION dropped to its lowest level in four years pointing to the probability of another rate cut next month.

Stuttering rents and construction was part of the reason that inflation fell further than expected in May, Australian Bureau of Statistics data shows.

Headline inflation fell to 2.1 per cent in May from 2.4 per cent in April, Michelle Marquardt, ABS head of prices statistics, said.

The monthly figure is the lowest since October 2024.

And the all-important annual trimmed mean inflation was 2.4 per cent in May 2025, down from 2.8 per cent in April.

While the majority of analysts think this means it is a certainty that the RBA board will cut interest rates again next month, taking the cash rate to 3.6 per cent, there are calls from saome for a 50-point cut.

Market economics MD Stephen Koukoulas is one of those, saying that inflation is in free-fall.

“The 8 July RBA meeting is a chance for it to start to correct its economic misreadings and errors and deliver the desperately needed 50-point interest rate cut,” he said.

“As I have been banging on about for some time now, the RBA over-hiked interest rates in late 2023.”

KPMG chief economist Brendan Rynne said Wednesday’s CPI data, which revealed inflation had slowed to 2.1 per cent in May, showed a continued pattern of deflation across the Australian economy.

“This could provide comfort to the Reserve Bank at its next meeting, knowing that any cut to the cash rate will occur in a stable inflationary environment,” he said.

“From KPMG’s perspective, a 25-basis point cut is warranted given the continued weakness in the private sector of the Australian economy.

“On top of that any increase in demand that comes about from a further drop in interest rates is unlikely to stoke the inflation genie in an unhelpful way.”

CBA economists say the RBA should cut rates in July by 0.25 percentage points to 3.6 per cent at its July 7‑8 meeting.

“A combination of a dovish May RBA decision and the flow of data since sees us shift our base case to a rate cut in July,” CBA’s Belinda Allen said.

“Today’s monthly CPI print capped off a flow of data that should provide comfort to the RBA that a swifter return of the cash rate to neutral is both manageable and needed,” she said.

HSBC chief economist Paul Bloxham also predicted back-to-back interest rate cuts by the RBA after the lower-than-expected CPI indicator for May.

“While the jobs market has remained resilient, GDP growth in was sluggish, and today’s data points to further disinflation,” Bloxhams says.

“The global backdrop also continues to pose significant risks. Our central case sees the RBA cut by 25 basis points in Q3, with today’s data meaning that a cut in July is likely.”

He expects a total of 75 basis points of cuts, taking the cash rate to 3.10 per cent by the March quarter of 2026.