A Reuters poll of 43 economists examined what they think the Reserve Bank of Australia (RBA) will do next. Most, 42 economists, predict the RBA will lower the cash rate to 3.85% on May 20. One economist expects a bigger cut of 50 basis points. Three major Australian banks—ANZ, Commonwealth Bank of Australia, and Westpac—anticipate a 25 basis point reduction, while NAB expects a 50 basis point cut. The median forecast suggests that the cash rate could fall to 3.35% by the end of 2025. ANZ updated its forecast after recent news about tariffs in April, now predicting a cash rate of 3.35%. Changes in global growth and shifts in the business climate are affecting these predictions. The current downturn in business activity supports the idea of an RBA rate cut. Tariff changes are also seen as a factor influencing consumer confidence and the overall economic outlook.

Expectations of Rate Reduction

Most economists agree the Reserve Bank will likely cut rates. Out of the 43 surveyed, nearly everyone expects a 25 basis point cut at the next meeting. Only one economist thinks the RBA might make a bigger cut of half a point. This view is in the minority, as most believe the change will be more gradual. These predictions aren’t based on guesswork; they are founded on recent data. Recent tariff developments have prompted some institutions to adjust their cash rate forecasts. For instance, ANZ has revised its outlook and now expects a drop to 3.35% by the end of next year. This suggests that the bank sees ongoing weakness in the domestic economy. Currently, business sentiment is low, and if this trend continues, the Reserve Bank may need to act sooner or more decisively. Consumption figures haven’t bounced back as expected, and the economy seems to be in a cautious state, focusing more on economic support rather than strictly controlling inflation.

Market Implications

For those involved in rate-sensitive instruments, it’s time to adjust positions. Timing is critical, as central bank actions are becoming clearer. Delayed responses can be costly. Rate cut options reflecting the majority view may become less appealing, while floating expectations in swaps and futures aren’t fully aligned with anticipated future cuts. Right now, discrepancies between market players and institutional forecasts create pricing inefficiencies. Major banks are allowing for a gradual reduction in rates, with Westpac and others supporting a series of smaller cuts rather than one large adjustment. Meanwhile, NAB believes conditions are enough to justify an early, larger cut. This difference in bank strategies is important and creates opportunities across the yield curve. Targeting shorter- and medium-term swaps aligns with the more cautious forecasts. Adjusting positions—either through directional bias or by taking advantage of volatility—may be necessary, especially where rates haven’t fully reflected potential downturns. Business sector weaknesses are a key indicator of how much monetary policy needs to adjust. While tariffs might seem external, they directly influence consumer behavior and spending, impacting the central bank’s assessments. It’s crucial to monitor this connection, especially as it relates to household demand data. Volatility hasn’t increased much, indicating stable expectations for rate movements. However, the cash rate path could still affect final pricing—making a calendar-specific strategy more appropriate in the short term than anticipating sharp changes. There are no surprises here. What stands out is the gap between the official stance and the actual economic situation. This gap is large enough to present trading opportunities. Create your live VT Markets account and start trading now.

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