The Reserve Bank of Australia (RBA) has reduced its policy rate by 25 basis points, bringing it to 3.85%, the lowest level since May 2023. This decision aligns with economists' expectations and reflects receding inflation concerns in the country, providing room for monetary policy easing. The RBA's move comes as Australia's inflation rate hit a four-year low of 2.4% in the first quarter of 2025, within the bank's target range of 2% to 3%.

While the RBA acknowledges a substantial reduction in upside risks to inflation, uncertainties surrounding global trade policy continue to weigh on the Australian economy. The central bank anticipates a temporary increase in headline inflation during the second half of 2025 due to the unwinding of government subsidies to households, after which inflation is expected to return to the midpoint of the target range.

Despite the overall positive trend in inflation, the RBA remains cautious, noting that household consumption may recover more slowly than initially projected. This slower recovery could lead to subdued growth in overall demand and a potential deterioration in the job market. Abhijit Surya from Capital Economics suggests that the RBA might cut rates further than currently anticipated, although he also believes the bank may have overestimated the impact of widespread trade tensions on the Australian economy.

Australia's economy has shown signs of recovery, with the latest GDP reading indicating a 1.3% year-on-year expansion in the fourth quarter, marking the first expansion since September 2023. However, analysts have highlighted downside risks related to global trade tensions and domestic economic uncertainty. HSBC analysts pointed to the tumultuous global economic and financial conditions since the RBA's previous meeting, including the imposition and subsequent suspension of U.S. President Donald Trump's "Liberation Day" tariffs, forecasting a modest negative growth impact on Australia and potentially disinflationary effects due to weaker global growth and trade diversion.

Carl Ang of MFS Investment Management also emphasized the increased downside risks and uncertainty surrounding Australia's economic outlook due to global trade policies, anticipating a dovish pivot from the RBA and forecasting a terminal rate of 3.1% in early 2026.