On Tuesday, May 20, the Reserve Bank of Australia (RBA) will conclude its meeting, which may result in a softening of monetary policy parameters. Most analysts believe the central bank will cut the interest rate by 25 basis points, marking another step in this direction after the February rate cut. The "dovish" scenario is the most expected, but it is not set in stone. Several fundamental arguments support a wait-and-see approach, so maintaining the status quo cannot be ruled out.

The case for a rate cut (the "dovish" scenario)

The majority of proponents of the dovish scenario point to the recently published inflation report in Australia, released after the RBA's April meeting. Despite appearing positive, the report showed that core inflation is now within the 2–3% target range. For the first time since Q4 2021, the trimmed mean CPI fell within this range. Additionally, the report revealed a notable decline in service-sector inflation to 3.7%, driven by falling rent and insurance costs.

The hawkish view

Interestingly, critics of the rate cut also cite the same inflation report, highlighting its hawkish elements. For instance, in Q1, the headline CPI rose by 0.9% q/q versus a forecast of 0.8%—a sharp jump from 0.2% in the previous two quarters. Year-over-year, CPI printed at 2.4%, slightly above the 2.3% forecast. March's monthly CPI also remained at 2.4%. The index reached the same level in the previous month, whereas analysts had predicted a minor decline in March, to 2.3%.

In other words, the inflation data are contradictory and cannot be definitively interpreted as supporting a rate cut or a pause.

Another argument for a pause: labor market strength

Employment surged by 89,000 in April—its strongest monthly growth since February 2024, and more than four times the expected 20,000. The gains were concentrated in full-time employment (59.5k vs. 29.5k part-time). Labor force participation reached 67.1%, the highest since January. Meanwhile, wage growth accelerated to 3.4% y/y in Q1, rebounding after slowing to 3.2% in Q4 2024. This gives the RBA room to hold off on further easing.

This result allows the Reserve Bank of Australia not to rush with the next interest rate cut.

Global uncertainty adds to the case for caution

The ongoing "U.S. vs. everyone" trade war is another factor. On the one hand, Donald Trump introduced a minimum 10% tariff on imports of Australian goods (Canberra did not even take retaliatory measures, "agreeing" with this decision of the American leader). That is, Australia itself suffered minimally from American tariffs. But at the same time, it is evident that the Australian economy is not isolated from the rest of the world, which means that the negative consequences of the secondary effects of the tariff confrontation will still manifest themselves, especially if the growth rate of the Chinese economy begins to slow down.

Therefore, the protracted pause before the announced trade negotiations between the US and China may become an additional argument for the RBA to maintain the status quo at the May meeting.

Conclusion

Despite forecasts from major banks like ANZ, Standard Chartered, and Westpac projecting a 25-bp rate cut, this outcome is far from guaranteed. Moreover, there are strong arguments in favor of maintaining a wait-and-see attitude in the form of "obstinacy" of inflation indicators against the backdrop of a stable labor market and global uncertainty.

Even if the RBA does implement the "dovish" scenario, it will likely maintain a cautious tone, potentially delivering a "hawkish cut," casting doubt on the widely held forecast of two additional cuts in H2 2025.

Market implications

This sets up a tense wait. If the RBA surprises and holds rates, the Australian dollar could rally—AUD/USD may break resistance at 0.6490 and aim to settle above 0.6500. If the RBA cuts as expected, much will depend on the tone of the accompanying statement and Governor Michele Bullock's comments. A cautious tone could support the aussie, keeping AUD/USD in the 0.6430–0.6490 range. However, explicitly dovish signals hinting at more cuts in H2 would favor AUD/USD bears, potentially pulling the pair back toward 0.6340 (the lower Bollinger Band on the daily chart).