The Reserve Bank of Australia (RBA) is facing sharply diverging expectations as its next monetary policy meeting approaches. While a broad consensus among economists and money markets now prices in an interest-rate cut, a new analysis from TD Securities argues for a prolonged hold, citing a wider-than-expected output gap.
Since late 2024, the macroeconomic backdrop has shifted dovish. Australia’s trimmed mean inflation — the RBA’s preferred gauge — has retreated from its 2022 peak of roughly 6.8% to just above the central bank’s 2–3% target, with the monthly CPI indicator falling to 3.4% in January 2025. The labour market has softened, with unemployment ticking up to 4.2% in February and underemployment rising. Household spending has contracted for three consecutive quarters, weighed down by mortgage stress. Globally, the U.S. Federal Reserve and European Central Bank have both signalled rate cuts in mid-2025, reducing pressure on the RBA to maintain high rates purely to defend the Australian dollar.
These signals have led all four major Australian banks — Commonwealth Bank, Westpac, NAB, and ANZ — to forecast a cut in the second quarter of 2025. Money markets now assign a 70% probability to a 25-basis-point reduction at the upcoming meeting, a stark reversal from the 40% chance of a hike priced in three months ago. Commonwealth Bank’s head of Australian economics, Gareth Aird, encapsulated the shift: “The data flow has shifted decisively. We see the RBA moving to an easing stance in May, with a total of 75 basis points of cuts by year-end.”
However, TD Securities presents a contrarian view. Its economists highlight that the output gap — the difference between actual and potential economic output — is wider than many estimates, indicating ongoing slack that naturally suppresses inflationary pressures. In this scenario, the RBA may see no immediate need to adjust rates either way, opting instead for an extended hold. The analysis suggests that the central bank will prioritize ensuring inflation is sustainably within the target band before any loosening, implying the cash rate could stay at 4.35% for several more months.
For households, the divergence creates uncertainty. A rate cut would deliver modest relief — roughly $95 per month on a $600,000 variable-rate mortgage — but a prolonged hold would extend the period of elevated repayments. For markets, the Australian dollar could see short-term support if the higher-for-longer narrative persists, while bonds might continue to price out early easing. The RBA’s next decision, due on May 7, 2025, will be closely watched for any shift in language regarding the output gap and inflation outlook, as both sides of the debate await conclusive data.
