Minutes of the May 2025 Monetary Policy Board Meeting

Minutes of the Monetary Policy Board Meeting

Hybrid – 19 and 20 May 2025

Members participating

Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor and Deputy Chair), Marnie Baker,

Notes

Renée Fry‑McKibbin, Ian Harper AO, Carolyn Hewson AO, Steven Kennedy PSM, Iain Ross AO, Alison Watkins AM Others participating Sarah Hunter (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial
Markets) Anthony Dickman (Secretary), David Norman (Deputy Secretary) Meredith Beechey Osterholm (Head, Monetary Policy Strategy), Sally Cray (Chief Communications
Officer), David Jacobs (Head, Domestic Markets Department), Michael Plumb (Head, Economic
Analysis Department), Penelope Smith (Head, International Department) Financial conditions Members began their discussion by considering the evolving news on US tariff policy and its impact on
global financial markets. The tariffs announced by the US administration on 2 April and subsequent
days had been much higher than expected and had led to retaliation in kind by China. Subsequent decisions
had paused or reduced some of these increases, at least temporarily; however, at the time of the meeting
tariffs were still well above previous levels and future tariff decisions remained highly unpredictable.
In response, financial markets had been turbulent. Equity prices, bond yields and many commodity prices
had initially fallen quite sharply, and expected volatility in US equity markets had risen to levels only
exceeded in recent decades during the global financial crisis and the early days of the COVID-19 pandemic. However, these moves had all been largely or fully unwound,
leaving pricing in many global financial markets only modestly changed compared with the time of the
previous meeting. Financial market participants’ expectations for central bank policy rates in many
advanced economies had also declined initially and then recovered, but the recovery in policy rate
expectations had generally been incomplete. Markets expected most central banks to continue lowering
interest rates from their current levels. Longer term government bond yields in advanced economies had initially declined following the tariff
announcements but were generally higher than at the time of the previous meeting, especially in the
United States. Market functioning had been somewhat strained at times. Members noted that concerns about
the US fiscal position appeared to have contributed to rising term premia. Measures of inflation
compensation on US bonds had increased at shorter terms but had fallen over longer horizons, perhaps
reflecting an expectation that current tariff settings would be reversed. Inflation compensation on bonds
issued by most other countries had declined, driven by falling oil prices and concerns over the impact of
tariffs on growth. In corporate funding markets, both equity prices and spreads on corporate bonds had
largely recovered from sharp sell-offs immediately following the 2 April tariffs announcement. In
several markets, including Australia, equity prices were now higher than before that announcement.
Members discussed how the rebound could be reconciled with the likely adverse effects on global growth of
persistently higher tariffs and policy uncertainty. One possibility was that market participants expected
further reversals in tariffs. Another was that they expected the effects of tariffs to be more or less
offset by stimulatory fiscal and monetary policy in the United States, China and elsewhere, or by the US
administration’s planned deregulation agenda. Members noted that such assumptions might prove overly
optimistic. They also noted that an adverse global economic outlook was likely to be worse for smaller
businesses (which typically are not represented on public equity markets), given they generally have
smaller cash buffers. The Australian dollar had also been volatile, depreciating sharply in early April before rebounding. On a
trade-weighted basis, the Australian dollar was around the same level as it was in late 2024. A
broad-based depreciation of the US dollar and the Chinese renminbi since early April had offset
depreciation of the Australian dollar against the currencies of most other trading partners. Members
discussed the somewhat unexpected depreciation of the US dollar in response to the announced
increase in US tariffs, which might have been expected to produce an appreciation as the outlook for
import growth worsened. The depreciation might reflect an uncertainty premium being applied to US-dollar
assets, a correction of previously overweight exposures to US assets or changes in hedging behaviour. Members then turned to consider how broader Australian financial conditions had evolved. Like the
US dollar, Australian markets had been similarly volatile in response to the news about tariffs.
Liquidity had declined sharply in the bond market for a time, as it had in other jurisdictions, as a
significant number of participants sought to unwind common positions quickly. However, markets had
continued to function adequately, and there had not been a broader shift to cash as seen during the
global financial crisis or the pandemic. The demand for liquidity at the RBA’s operations had been
little changed overall, in part because the level of reserves remains high. Market expectations for future monetary policy in Australia had moved markedly lower for a time in early
April but had partly retraced since then. The swing in policy expectations had been more amplified in
Australia than in other economies, largely reflecting thin liquidity in markets but possibly also
Australia’s greater trade exposure to China, the flow of domestic data and a perception that
international developments were more likely to weigh on inflation in Australia. Policy rate expectations
were now consistent with monetary policy being eased by a little more than had been expected at the
previous meeting. Market pricing implied a total of around three 25 basis point reductions this
year, a little more than expected at the time of the previous meeting. A 25 basis point reduction in
the cash rate at the current meeting was widely anticipated. The shift lower in policy rate expectations
had been due to both international developments and domestic data relating to consumption and inflation.
Members noted that the market-implied path of the cash rate lay within the wide – and inherently
uncertain – range of model-based and market economists’ estimates of the neutral interest
rate. Growth in housing credit had been stable in recent months, at around its post-2008 average and a little
below growth in household incomes. By contrast, business credit growth had been running ahead of nominal
GDP growth, despite weakness in business investment. Members discussed some potential explanations for
this, including business credit growth being supported by firms seeking to raise previously low levels of
leverage and strong competition among lenders. Issuance of corporate bonds had paused during the period
of heightened volatility in early April but had since resumed. Scheduled household debt payments had eased following the reduction in the cash rate in February but were
still around their highest levels since 2012. Extra mortgage payments remained above their pre-pandemic
average, consistent with the weakness seen in household consumption. Members noted that some banks do not
automatically adjust mortgage payments following a reduction in lending rates, which would have
mechanically increased extra payments into redraw accounts as interest rates fell. Economic conditions Members turned their discussion to how a persistent increase in trade barriers would affect the global
economy. They noted that policy unpredictability had created a highly uncertain environment, depressing
sentiment measures in several developed economies outside Australia; in itself, that could weigh on
spending by businesses and households abroad. But the overall impact on global growth would also depend
on a range of other factors, including the outcome of ongoing trade negotiations, how easily global
trading patterns adjust to new tariff settings, and the fiscal and monetary policy response of
authorities. Members noted that Chinese authorities had already eased monetary policy and had indicated
their willingness to ease fiscal settings further to support economic growth. Authorities in some other
economies (particularly in Europe) had also signalled that fiscal settings would be loosened. Members considered the potential effects on global inflation, noting that these were ambiguous and likely
to vary across countries. Inflation in the United States was expected to increase in the near term as
higher tariffs would, to some extent, be passed through to consumer prices. Countries not levying new
tariffs, including Australia, were more likely to see downward pressure on inflation as weaker global
demand and the possible diversion of goods that would otherwise have been sold to the United States
depressed prices. But it was also possible that tariffs could impair the complex interlinkages in global
supply chains, in turn lifting the prices of traded goods globally. Members noted that the available data suggested that, prior to the escalation in international trade
tensions, economic activity in Australia had been evolving broadly as expected three months earlier. GDP
growth had increased in the December quarter 2024 and year-ended growth looked to have picked up a little
further in the March quarter. Within that aggregate, indicators of household spending suggested that
growth in consumption in early 2025 had been a little lower than expected in February. In part that
reflected the impact of flooding in Queensland and New South Wales. But underlying momentum also appeared
to have been a little weaker, continuing a pattern that had been evident for some time. Members observed
that earlier declines in real household disposable income remained a constraint on consumption, though
higher household wealth provided some offset. The limited information available for the June quarter suggested that recent international developments
had so far had little impact on domestic activity. Survey measures of business and consumer sentiment had
been little changed. While liaison contacts had noted uncertainty about the international outlook, they
still perceived domestic conditions as generally favourable and most were not yet revising their
investment or hiring decisions in response to global developments. Labour market conditions had also so far remained in line with the previous forecasts. The unemployment
rate had been around 4.1 per cent since the middle of 2024, while the underemployment rate had
declined a little over that period. Employment had recovered from the surprising fall recorded in
February. As expected, wages growth had increased slightly in the March quarter, owing to some
administered wage decisions and new agreements coming into effect, but it remained lower than a year
earlier. Members observed that the rate of voluntary job turnover had declined and that,
anecdotally, the focus of wage bargaining and employment disputes had tilted in favour of workers seeking
greater job security. Some questioned whether this might see wages growth slow more noticeably than
currently forecast. Members welcomed the broad-based easing in underlying inflation over the preceding year. Trimmed mean
inflation had returned to the 2–3 per cent range for the
first time since late 2021 and, in six-month annualised terms, was at the midpoint of that range.
Although this path had been expected, it provided welcome confirmation that potential upside inflationary
risks had not crystallised. Members noted that services price inflation had eased back to around its
historical average and that new dwelling costs had fallen further. Headline CPI inflation had
been unchanged at 2.4 per cent in year-ended terms in the March quarter and continued to be
affected by the timing of payments under government cost-of-living relief measures to
households. Members considered what these developments implied for the degree of spare capacity in the economy. The
staff’s assessment was that there was still some tightness in the labour market. This was consistent
with a range of indicators, including survey measures of the share of firms reporting that labour
availability is constraining output, the high level of job vacancies, and persistently high growth in
unit labour costs. Members discussed the extent to which downward pressure on firms’ margins had
weighed on inflation, including in house building, noting that there were reports from liaison that weak
demand had limited the ability of firms to pass increases in input costs fully through to output prices.
They acknowledged that, while broader capacity pressures in the economy appeared to have eased,
there remained considerable uncertainty around assessments of the degree of spare capacity. Outlook Members noted that the outlook for the global economy had deteriorated over the preceding three months,
given developments in trade policies, but that the extent of the deterioration was unusually uncertain.
In the baseline forecast – which assumed that tariffs remain around their current levels and that
policy uncertainty gradually falls but remains high – growth in Australia’s major trading
partners (weighted by their share of Australia’s exports) was expected to slow in 2025 and 2026. The
largest downgrades to the growth outlook had been for the United States and several other countries with
a high reliance on goods trade. By contrast, the outlook for output growth in China was little changed,
reflecting an assumption of increased policy stimulus. Members noted that sentiment in China had improved
prior to the announcement of significantly higher-than-expected US tariffs on imports from China, and
that authorities there appeared to be both committed to their growth target of around
5 per cent and able to provide more stimulus to the economy if required. In light of those developments, and the most recent domestic data, the baseline forecast was for
Australian GDP growth to pick up a little less rapidly than forecast three months earlier. That reflected
three main assumptions: global demand for Australian exports was projected to be somewhat weaker; some
weight was placed on the possibility that heightened policy uncertainty might dampen domestic investment
and household spending; and near-term momentum in consumption was a little weaker. The technical
assumption of a lower cash rate path than in the February forecasts provided some offset to the forecast
for domestic activity. The weaker outlook for Australian GDP growth in the baseline forecast resulted in the forecast rise in the
unemployment rate being slightly larger than previously expected, and the forecast for inflation being
slightly lower. Underlying inflation was now expected to be around the midpoint of the 2–3 per cent target range throughout the forecast period.
Headline CPI inflation was forecast to be more volatile because of the effects of government energy
rebates, and to exceed the target range for a time in early 2026. Given that the rapidly evolving and unpredictable global policy environment was creating more uncertainty
than usual around the baseline forecasts, members also considered a range of alternative scenarios for
how the Australian economy might evolve under different policy assumptions. One of these scenarios
involved an escalation of the trade conflict in which much higher levels of tariffs are imposed
permanently, causing global sentiment, growth and asset prices to fall sharply. Absent a material policy
response, this would be likely to cause a sharp slowing in Australian GDP growth and an associated sharp
rise in the unemployment rate. By contrast, there were scenarios in which there was a swift easing in the
trade conflict, which could reduce policy uncertainty. Such scenarios, if still accompanied by stronger
policy stimulus abroad than previously expected, could result in a more pronounced recovery in Australian
output growth and somewhat higher inflation. Considerations for monetary policy Turning to considerations for the monetary policy decision, members noted that there had been further
welcome progress towards the Board’s objectives. Underlying inflation had continued to decline, in
line with prior projections, and the forecasts were for it to remain close to the midpoint of the 2–3 per cent range over the forecast period. Activity had
picked up and employment growth had remained solid. The labour market was still judged by the staff to be
tight and the output gap slightly positive, although there remained significant uncertainty about these
judgements. In contrast with domestic conditions, which had evolved close to expectations, there had been significant
and unexpectedly adverse developments in the global economy. It was challenging to predict how global
trade policy would evolve, but most scenarios posed some downside risk to Australian activity and
inflation – and there were some scenarios in which the impact could be significant. The uncertainty
associated with global trade policy had also caused liquidity in financial markets to become strained for
a time, though this had mostly recovered. Members assessed monetary policy to be still somewhat restrictive at the current level of the cash rate,
although the extent of that restrictiveness was subject to considerable uncertainty. In light of these developments, members considered whether to leave the cash rate target unchanged at this
meeting or to lower it. The case to hold the cash rate target unchanged rested on three main considerations. First, while
underlying inflation had returned to the 2–3 per cent range,
headline inflation was expected to rise back up to the top of the target band as energy subsidies
unwound. Moreover, labour and product markets remained relatively tight, implying some risk to inflation
being contained. Second, there had so far been few observable effects on the Australian economy from
developments in the global economy, and policy was evolving on an almost daily basis, so there could be a
case for waiting to see if more convincing signs of a domestic impact emerged before adjusting policy.
Third, to the extent that the stance of monetary policy was judged not to be very restrictive at its
current level, it might not yet be appropriate to relax it. The case to lower the cash rate target rested on three different considerations. First, the progress made
in returning inflation to target without upside risks having crystalised. Second, an assessment that
global developments and near-term trends in household consumption had shifted the balance of risks
downwards. And third, the possibility that the prevailing uncertainty from global events might best be
managed by adopting a path of least regret, which, given the current distribution of risks, would be
likely to involve a lower cash rate. In discussing the case to ease policy, members observed that trends in domestic conditions could, on their
own, justify some degree of reduction in the cash rate target at this meeting. Underlying inflation had
continued to ease as expected, was back at the midpoint of the 2–3 per cent range in six-month annualised terms and was
forecast to remain close to the midpoint throughout the forecast period. The forecast was also
conditioned on a technical assumption for the cash rate that incorporated a reduction at this meeting.
And the downward revision to the staff’s forecast for consumption suggested there might be a little
less momentum in private demand than previously assumed. Developments in the global economy since the previous meeting strengthened the case for a reduction in the
cash rate target. Members noted that the rise in global tariffs and increase in policy uncertainty had
adversely changed the outlook for growth in Australia’s major trading partners. It was difficult to
quantify the impact of this on Australian activity at this early stage, while international trade policy
was still in flux. But the baseline forecast was for a negative effect; and there were scenarios in which
output growth could be materially weaker than this. Members noted that, while it was possible that higher
global tariffs could lift Australian inflation through impaired supply chains, it was more likely that
they would prove to be disinflationary, through weaker aggregate demand. Having weighed up these alternative arguments, members judged that the case to reduce the cash rate target
was the stronger one. They agreed that monetary policy had been effective in bringing inflation back to
target, and that it was no longer necessary to be as restrictive given the current rate of inflation and
the staff’s assessment of spare capacity. In addition, members judged that a lower cash rate would
also be an appropriate response to the downside risks that had emerged from international developments
since the previous meeting. Having determined that it was appropriate to lower the cash rate target at this meeting, members turned
their attention to the size of the reduction. A 25 basis point reduction in the cash rate target at this meeting would be consistent with the
technical assumption for the path of the cash rate underpinning the baseline staff forecast, which had
underlying inflation expected to remain around the midpoint of the target range over the forecast period.
It would recognise the progress made on inflation and the slightly softer outlook for domestic
consumption suggested by recent data. It would also give weight to the likelihood that global
developments will slow the recovery in activity growth somewhat, while recognising that international
trade policy settings were still fluctuating and that so far there were no data signalling an adverse
impact on domestic demand in Australia. A 25 basis point reduction would ensure that monetary policy
settings remained predictable at a time of heightened uncertainty, given market expectations. And it
would leave the Board well placed to respond as needed as the economy evolved. Limiting the reduction to 25 basis points could be justified by several key uncertainties to the
outlook. There were concerns about the strength of the supply side of the Australian economy: for
example, productivity growth so far had shown no signs of increasing, and uncertainty about the extent of
tightness in the labour market was two-sided. It was also possible that the forecast increase in
aggregate demand would facilitate a recovery in profit margins, which would provide more momentum to
inflation than expected. And the imposition of higher tariffs in other countries might prove more
disruptive for global supply chains than had been factored into the baseline forecasts, raising prices
globally. More broadly, members observed that it could be challenging for households and firms if the
Board subsequently sought to reverse a loosening in policy that, in hindsight, proved to be too rapid. On the other hand, a larger reduction in the cash rate target at this meeting could be appropriate if
members judged that the downside risks stemming from either global or domestic developments warranted
easing monetary policy more quickly than assumed in the baseline forecast. Members discussed scenarios in which global policy unpredictability had more negative consequences for the
world economy than was assumed in the baseline, including the adverse scenario set out in the May Statement on Monetary Policy . They agreed that monetary policy would need to move to an
expansionary setting in the event these scenarios materialised. Members observed that there were also
downside risks to the outlook stemming from the domestic economy, including that household consumption
does not pick up as quickly as envisaged in the baseline forecast or that wages growth slows by more than
forecast alongside a softening labour market. In light of this, members noted that a reduction in the
cash rate could be warranted on the basis of either domestic or global factors, and that the combination
of these might therefore warrant a 50 basis point reduction at this meeting. Members noted that it
would be important that a larger reduction at this meeting should not be taken as implying a view that
the cash rate path should be lower over the entire forecast period, merely that it reaches the same level
sooner to provide greater insurance against more adverse scenarios. Having weighed up these alternative arguments, members decided that the case to lower the cash rate target
by 25 basis points at this meeting was the stronger one. They agreed that developments in the
domestic economy on their own justified a reduction in the cash rate target and that the case for that
action was strengthened by developments in global trade policy. However, members were not persuaded that
the combination of these was sufficient to warrant a 50 basis point reduction at this meeting.
Members noted the absence of signs in the Australian data to date that global trade policy uncertainty
was having a significant negative impact on the economy, and that some plausible adverse scenarios could
see upward pressure on inflation. They also judged that it was not yet time to move monetary policy to an
expansionary stance, taking account of the range of estimates involved, given that inflation was yet to
return sustainably to the midpoint of the target range and the staff’s assessment that the labour
market was still tight. These considerations and the prevailing global policy uncertainty led members to
express a preference to move cautiously and predictably when withdrawing some of the current policy
restriction. In finalising the policy statement, members agreed that it was appropriate to convey their commitment to
both of the Board’s objectives. They also agreed to convey that policy was well placed to respond
decisively to international developments if they were to have material implications for activity and
inflation of the kind described in the severe downside scenario set out in the May Statement on
Monetary Policy . Members affirmed that future decisions will be guided by the incoming data
and the evolving assessment of risks. They agreed that the Board should remain focused on its mandate to
deliver both price stability and full employment and that it will do what it considers necessary to
achieve that outcome. The decision The Board decided to lower the cash rate target by 25 basis points to 3.85 per cent.