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Major banks have begun changing cash rate forecasts after underlying inflation eased in May.
Underlying inflation fell to its lowest level since November 2021 to remain firmly within the RBA target band, prompting a big four bank to revise its cash rate forecast.
The annual trimmed mean of inflation in May fell to its lowest level since November 2021, according to Australian Bureau of Statistics (ABS) data, as inflation eased further last month.
Annual trimmed mean, or underlying inflation (which this month excluded the annual falls in automotive fuel and electricity, alongside other large price rises and falls), was 2.4 per cent in May, down from 2.8 per cent in April.
The overall monthly Consumer Price Index (CPI) indicator rose 2.1 per cent in the 12 months to May 2025, slowing from a 2.4 per cent rise in the year to April. This was the lowest figure since October last year.
The largest contributors to the annual movement were food and non-alcoholic beverages (up 2.9 per cent), housing (rising 2.0 per cent), and alcohol and tobacco (up 5.9 per cent).
New dwelling prices, which capture new builds and major renovations, rose 0.8 per cent in the 12 months to May, compared to a 1.2 per cent rise in the 12 months to April.
This is the smallest annual growth since April 2021 as project home builders offered discounts and promotional offers to entice business. In the month of May, new dwelling prices were unchanged.
Rents rose 4.5 per cent in the 12 months to May, following a 5.0 per cent rise in the year to April. The change marks the lowest annual growth in rental prices since December 2022, consistent with smaller increases in advertised rents and stable vacancy rates across most capital cities. In monthly terms, rental prices rose 0.3 per cent.
More rate cuts to come?
The quarterly annual trimmed mean of inflation is one of the figures the Reserve Bank of Australia (RBA) is most interested in when setting the official cash rate.
As with the March 2025 quarter, the measure for May sits comfortably within the RBA’s target band, giving the central bank confidence that inflation is under control and boosting hopes of a rate cut when it next meets on 7–8 July.
Commenting on the new inflation figures, Peter White, managing director of the Finance Brokers Association of Australia (FBAA), said: “Today’s trimmed mean inflation rate of 2.4 per cent, the lowest since 2021, is great news for Australia.
“However it also presents the federal government with an opportunity to take one more important step to open access to the housing market for hundreds of thousands more Australians, by finally reducing the serviceability buffer rate.
“With today’s figures, it is highly likely that interest rates will fall further from next month, which in itself will help those trying to enter the market or refinance.
“The 3 per cent buffer rate is obsolete in the current climate. It is a relic of the age of extremely low rates and can – and should – be reviewed periodically, meaning it can be raised again in the future if needed.”
In its minutes for the May/June cash rate decision, when it dropped rates by 25 bps, the RBA board welcomed the easing in underlying inflation and said it “provided welcome confirmation that potential upside inflationary risks had not crystallised”.
After the release of the latest inflation data, the Commonwealth Bank of Australia (CBA) revised its cash rate forecast, now expecting a rate drop in July. It cited the RBA’s dovish May decision and subsequent economic data as key factors behind the shift.
Belinda Allen, CBA senior economist, said: “We now expect the RBA to cut the cash rate by 25bp to 3.60 per cent at its 7‑8 July meeting. And a follow-up 25bp rate cut in August.”
Australia and New Zealand Banking Group (ANZ) still expects 25-bp cuts in both August 2025 and February 2026. The major said at the start of June that the RBA board will leave the cash rate unchanged in July, although it will go into the July meeting with the “option to ease if conditions warrant”.
Westpac continues to forecast the RBA to hold in July and cut in August and November. A lower inflation outlook now makes two further cuts in early 2026 likely, chief economist Luci Ellis said earlier this month.
National Australia Bank (NAB) economists are forecasting the central bank to cut rates by 25 bps in July and August and then again in November, taking the cash rate to a terminal rate of 3.1 per cent.
AMP economist My Bui said the mild inflation data, coupled with sluggish GDP growth, means that the RBA is likely to cut rates further throughout this year.
The bank expects the RBA to make cuts in July, August, and November this year and February next year, taking the cash rate to 2.85 per cent.
[Related: May rate cut ‘near certainty’ as inflation hits RBA target]
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