Statement on Monetary Policy – May 2025Overview

In Australia, inflationary pressures have continued to ease, and both headline and underlying inflation are within the 2–3 per cent range. The unemployment rate has remained steady and employment growth has remained firm, but the pick-up in household consumption seems to be a bit softer than previously expected. The global economic outlook has worsened following the introduction of higher tariffs by the United States and a significant increase in uncertainty related to trade policies. This is expected to weigh on Australia’s domestic activity and inflation in the forecast period, slowing the pick-up in GDP growth a little while inflation returns sustainably to around the midpoint of the target.

The Monetary Policy Board judged that the risks to inflation had become more balanced but that the outlook is uncertain and depends heavily on unpredictable developments in global trade policy. Against this backdrop, the Board decided to lower the cash rate target by 25 basis points to 3.85 per cent.

Underlying inflation has returned to the 2–3 per cent range.

Underlying inflation has continued to decrease as expected. Trimmed mean inflation was 2.9 per cent over the year to the March quarter. The slowdown in underlying inflation has been broadly based.

Headline inflation was 2.4 per cent over the year to the March quarter. Temporary government subsidies to households continued to weigh on the year-ended rate. Quarterly inflation picked up in March, however, as some of these subsidies were unwound.

Labour market conditions have been steady, as expected.

The unemployment rate has remained around its current level of 4.1 per cent. The labour market is still judged to be tight, although the assessment of full employment is uncertain. Year-ended wages growth increased slightly in the March quarter but is lower than a year ago as momentum in private sector wages has declined over the past year. However, growth in broader measures of labour costs – including unit labour costs – remains elevated, partly due to subdued productivity growth. The share of firms reporting that labour availability is constraining output remains higher than usual.

Growth in household consumption in early 2025 appears a little weaker than expected. GDP growth over the December and March quarters is likely to have been broadly as expected in February. That said, partial data for early 2025 suggest a softer pick-up in household consumption growth in the near term than previously forecast.

Globally, uncertainty has increased.

Global trade policy uncertainty has risen substantially following the announcement of significant increases in tariffs by the United States in early April. Many of these tariffs were subsequently reduced as the United States announced pauses to allow trade negotiations to take place. The Chinese authorities also lowered the tariffs they had announced on US imports in response and signalled a more expansionary policy stance to support domestic economic growth. Financial market liquidity was strained in early April and pricing was volatile, but markets did not experience the persistent disruptions seen in some past episodes of stress. Market participants have lowered their expectations for the paths of central bank policy rates in most advanced economies, consistent with expectations of weaker economic outcomes. However, market pricing suggests that participants see the risk of a severe downturn as low, posing downside risks if the trade conflict re-escalates.

The outlook for the economy is a little weaker amid heightened uncertainty.

Given the range of potential outcomes for trade policy and the global economy, the outlook for the domestic economy is more uncertain than usual. To assess a plausible range of outcomes for Australia’s economy, we have complemented our baseline forecast with scenarios.

The outlook for the global economy has deteriorated. Trade policy developments and associated uncertainty are likely to weigh on global economic activity, but the expected effect on inflation rates in overseas markets is less clear. For countries that have not imposed higher tariffs, weaker global demand should put downward pressure on inflation, though any disruption to global manufacturing supply chains could lead to higher prices for some goods.

In response, financial market participants have revised down their expectations for the path of the cash rate a little. This has flowed through to lower interest rates on private sector debt in Australia, with the decline in risk-free rates more than offsetting a slight rise in risk premiums. The Australian dollar is little changed on a trade-weighted basis, despite considerable volatility in recent weeks. Appreciation against the US dollar has been offset by depreciation against the currencies of other major trading partners.

Domestic GDP growth is still expected to pick up, but at a somewhat more gradual pace. Although there have not been signs of a material deterioration in leading indicators, the pick-up in GDP growth is expected to occur more gradually than previously forecast due to softer global demand and weaker consumption momentum. The effects of weaker demand are somewhat offset by the lower market path for the cash rate, on which the forecasts are conditioned.

Labour market conditions are expected to ease slightly. Consistent with the softer outlook for domestic growth, the unemployment rate is expected to increase a little over 2025 before stabilising in early 2026. Employment growth is forecast to ease by slightly more than expected in the February Statement but remain positive, and wages growth is forecast to stabilise at a slightly lower rate.

In the baseline forecast, underlying inflation is projected to return to and remain sustainably around the midpoint of the 2–3 per cent range. Conditioned on the market path for policy, the outlook for domestic inflation has been revised a little lower since the February Statement. This reflects judgements that the trade conflict will be disinflationary for Australia and that the softer outlook for domestic growth will return the economy and labour market closer to balance. Headline inflation is expected to increase over the second half of 2025 as temporary government subsidies to households are unwound, before returning to around the midpoint of the target range later in the forecast period.

With heightened global uncertainty, and the current unpredictability of trade policy, there are many plausible paths for how the economy might evolve. In this Statement we illustrate some of these paths with scenarios. The baseline forecast assumes that tariff rates remain around their current levels and the impact of trade policy uncertainty gradually declines over the year ahead but remains elevated relative to history. A re-escalation of the trade conflict that primarily weakens demand could lead to a slowing in domestic activity, a sharp rise in the unemployment rate and a decrease in inflation. If the trade conflict causes material supply-side disruptions, inflation could move in the other direction. By contrast, a swift resolution to the trade conflict and reduced uncertainty could see upside economic risks to the baseline forecast.

The Monetary Policy Board decided to lower the cash rate target by 25 basis points to 3.85 per cent.

The Board judged that the risks to inflation had become more balanced but was mindful of the considerable uncertainty about the outlook. International developments are expected to weigh on the economy and, with inflation expected to remain around target, the Board judged that it was appropriate to ease monetary policy at this meeting. The Board nevertheless remains cautious about the outlook. The Board considered the severe downside scenario presented in this Statement and noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia. The Board will be attentive to the data and the evolving assessment of risks and is focused on its mandate to deliver price stability and full employment.