The Reserve Bank of Australia (RBA) is at a turning point, and markets are buzzing with speculation on what’s next. Inflation is simmering down, and global headwinds are stirring the pot. A recipe that gives the RBA room to move lower on interest rates.

What’s Driving the Shift?

The RBA nudged the cash rate down 25 basis points (0.25%) in February but held steady in April. Since then, the argument for more rate cuts has picked up steam. Inflation, once a stubborn beast, is tamer now with the December quarter 2024 showing headline CPI at 2.4% and underlying inflation at 3.2%, right around the RBA’s 2–3% sweet spot. Shoppers are spending less, and wage hikes are slowing, which takes the heat off prices. But the world stage is a wild card—US tariff talks, and geopolitical jitters are raising flags about growth, pushing economists to rethink what the RBA might do.

NAB’s latest insights paint a vivid picture. In its 10 April 2025 Monetary Policy Update, NAB highlights global growth concerns and tariff impacts on Asia as key inflationary risks for Australia. They note a meaningful drop in housing-related inflation, while a weaker Australian dollar could add pressure on imported goods inflation. NAB also warns of weaker consumer and business confidence, alongside potential national income hits from softer commodity prices, all of which tilt the balance toward supporting growth. They now expect the RBA to cut the cash rate by 50 basis points in May, followed by 25 basis point cuts in July, August, November, and February, targeting a cash rate of 2.6% by early 2026. NAB also expects to see GDP growth of 2.0% in 2025 (down from 2.4%) and unemployment peaking at 4.4% before settling around 4.1% by late 2026.

The RBA itself is keeping its cards close. In its April statement, it said it’s watching global and local trends, ready to act if inflation or jobs take a hit. Governor Michele Bullock insists decisions will hinge on data, not market hype. Her caution hints to the possibility that the RBA might not sprint as fast as traders hope.

RBA vs Markets: A Tense Standoff

However, traders are ignoring Bullock’s reticence and signalled a 100% chance of a 25 basis point cut in May, according to Bloomberg futures pricing. They are also eyeing further reductions by year’s end, which could pull the cash rate to around NAB’s projected levels. If the RBA remains circumspect, stocks or bonds might wobble, making May’s meeting a date to circle in red.

Three Ways to View the Market

With the RBA’s next steps up in the air, different scenarios point to distinct market outcomes. Here are three ways to think about what might unfold, each tied to a possible RBA move:

1: A Swift Easing Beat: If the RBA cuts rates quickly and matches NAB’s forecast of a 50 basis point drop in May, followed by four more 25 basis point trims by early 2026 to land at 2.6%, history shows some sectors thrive in this setup.

Construction materials often get a boost as cheaper interest rates fuel homebuilding, and companies in related sectors could also benefit. For example, Real Estate Investment Trusts (REITs) may benefit if loan costs drop and property prices perk up.

2: A More Measured Approach: If the RBA eases more gradually, perhaps skipping the 50 basis point cut and sticking to smaller, less frequent moves, dependable sectors often shine. Grocery chains and health firms tend to hold steady when rates ease slowly.

Gold stocks add a bit of dazzle, too, as lower bond yields could make the metal more tempting, particularly if in combination with volatility, which has been part and parcel of market activity so far this year.

3: Ready for a Hold: What if the RBA digs in, keeping rates firm longer than markets expect? In this setting, safe bets take the lead. Companies with strong balance sheets and minimal debt would outshine heavily leveraged peers. It’s an outlier outcome from a market perspective but remains possible given Bullock’s cautious tone.

What’s Next: May’s Big Moment

The RBA’s 19-20 May 2025 meeting will be a game-changer. A 50 basis point cut, as NAB predicts, would signal urgency to prop up growth, while smaller steps would nod to a more cautious stance. If the RBA stays put, markets might blink, adjusting to Bullock’s steady hand.

The cash rate is currently at 4.10% and we have set out the different scenarios in play. Where to next for the RBA will likely be influenced by unemployment and inflation data, as well as shifts in the global environment.  NAB notes the situation’s fluidity, with “large bands of uncertainty” around forecasts—tariffs could ease, or growth risks could deepen, shifting the RBA’s bias.

After years of climbing rates, Australia’s money policy is tilting toward growth, and it’s a shift that’s hard to look away from. Investors will make their own decisions on which way the RBA will move, but given the clear disparity in views on where the cash rate will fall, being nimble and prepared to shift quickly may prove a sound strategy. The next cash rate chapter in May will provide clearer insight into how the rest of the year will play out.

To discover more call 1300 683 106 or email us on investordesk@nab.com.au

The information contained in this article is believed to be reliable as at April 2025 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article.

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