RBA Cuts Rates, Warns of Trade War Risks and Recession Scenarios; AUD/USD Slides

AUD Slides as RBA Governor Tempers Rate Cut Bets amid Trade War Fears

RBA Governor Michele Bullock held a highly anticipated press conference after the Bank cut the cash rate by 25 basis points to 3.85%. Market expectations of multiple rate cuts in H2 2025 exposed the AUD/USD pair to increased volatility during the press conference.

Key Takeaways from the Q&A:

• Australia’s economy could easily be compromised if a trade war between the US and China escalates.
• Depending on where we end up on trade developments, there might be more interest rate adjustments. But for now, rates are in the right place.
• We are still not sure that the financial markets will remain nice and steady. It’s not just uncertain, it’s unpredictable.
• The range of outcomes could be quite wide, and we have to be alert to a bad outcome.
• Scenario analysis suggests there could be a recession in a worst-case scenario.
• Two options discussed: hold or lower. While the option to hold was briefly discussed, most of the focus centered on whether to cut by 25 or 50 basis points.
• Putting international developments aside, there was scope to lower rates.
• While the RBA was confident to cut rates, the uncertainty and unpredictability relate to the outlook.
• RBA expects lower rates and rising wages to boost household consumption. But spending has not picked up as much as expected.
• We have managed to get inflation back while keeping the labor market on a solid footing.
• The Australian labor market and household spending remain the most significant domestic risks.
• We can’t let inflationary expectations rise.
• The market path is reflecting a possibility of a really bad outcome, pointing to a lower cash rate.
• Different from the February rate cut, as things have changed, massive uncertainty about where tariffs will end and what impact they might have.
• The baseline forecast takes inflation to the middle of the band, but the RBA remains data-driven.

Expert Views on the RBA Rate Path

Shane Oliver, Head of Investment Strategy and Chief Economist at AMP, remarked on the earlier RBA Statement, signaling the timing of a next rate cut, stating:

“RBA monetary policy is “somewhat less restrictive” but the cash rate is still above the avg of the RBAs estimates of neutral (~ 2.8% in this chart). With trimmed mean infl expected to be around target & policy still tight further cuts are likely. We expect the next cut in Aug.”

AUD/USD Reacts to Governor Michele Bullock’s Q&A Session

The AUD/USD pair tumbled in reaction to the RBA rate statement, initially climbing to a high of $0.64438 before sliding to a low of $0.64224. Ahead of the press conference.

Losses in AUD/USD deepened during the RBA press conference, falling from $0.64374 to a low of $0.64073 before steadying. The market reaction reflected bets on another RBA rate cut, widening the US-Australia interest rate differential in favor of the US dollar.

On Tuesday, May 20, the AUD/USD was down 0.48% to $0.64247.

For a comprehensive analysis of AUD/USD trends and trade data insights, visit our detailed reports here.