On Thursday morning, Deutsche Bank reversed its earlier forecast, now expecting the Reserve Bank of Australia (RBA) to deliver a 25-basis-point rate cut in May. The shift comes just days after the bank had forecast a more aggressive 50-basis-point cut.
Deutsche Bank chief economist, Phil O’Donaghoe, said the sudden pivot in US trade policy had upended market assumptions
“A few hours ago, we would argue that the US took that off ramp. US equities surged almost 10 per cent after the US President announced a 90-day suspension of reciprocal tariffs for all countries except China, which in contrast saw an increase in its tariff rate to 125 per cent,” O’Donaghoe said.
“In light of those developments, we revert to our previous call for the RBA: a 25 bp cut in May, followed by 25 bp cuts in August, November and February. Our terminal rate remains at 3.1 per cent, but we now see that being reached in Q1-2026 instead of Q4-2025.”
But while Deutsche Bank has changed its mind on the size of the May rate cut, its general conviction around the path for lower RBA rates has increased, the economist said.
“The US tariffs still in place on China will – if sustained – significantly weigh on Chinese growth. Coupled with a 10 per cent ‘universal’ tariff on other countries, that will still weigh materially on the RBA’s assessment of the global growth backdrop. At the same time, the ‘new’ tariff regime will still likely prompt a disinflationary redirection of globally traded consumer goods from the US to Australia and other non-tariff consumer markets,” he said.
Interestingly, NAB has done the converse, announcing on Thursday that it now sees the RBA slashing rates by 50 basis points at its May meeting.
“Our call for a 50 bp easing in May reflects the fact that with the real cash rate of 1.3 per cent and policy currently restrictive, the RBA needs to play catch up. With longer periods between RBA board meetings now a feature of the RBA calendar, some flexibility on the policy front has been lost, especially when developments are moving fast,” NAB said.
“We now see the RBA easing more quickly through mid-2025, taking the cash rate to 2.6 per cent by February,” the bank added, tipping a further 25 bp easing at each of the November and February meetings.
Betashares has outpaced even NAB’s projections, declaring on Thursday that the Reserve Bank could deliver an out-of-cycle rate cut – followed by another at its scheduled May meeting.
Its chief economist David Bassanese said: “Nothing overnight lessens the need for a rate cut in May, and by hopefully more than 0.25 per cent, my view is the RBA should cut by 0.35 per cent.
“There is now also a strong case for the RBA to act earlier – given the large decline in consumer sentiment reported for April and the fact the next scheduled RBA policy meeting is over five weeks away.”
Speaking at Momentum Media’s Election 2025 event on Thursday, AMP’s Shane Oliver said a difference of opinion among economists is common. While he believes there is a chance the central bank could opt for a 50-basis-point cut in May, he does not see merit in an emergency cut.
“Emergency cuts are made in the midst of a market dysfunction, when money is not flowing properly through the economy, but we don’t have that situation,” he said, but conceded that if things do get worse, then such a move could be warranted.
“Bond markets are starting to take us in that direction, but I don’t think we’re at that point yet.”
Trump under pressure
Commenting on US President Donald Trump’s decision to pause most tariffs for a three-month period, Oliver said the move was largely driven by market pressure, as well as internal divisions within his administration.
“I think there is a lot of internal argument going on, and that also caused a bit of a backdown. He [Trump] can always dress it up as well. He said, ‘I’ve got 75 countries lining up to have a chat with me’,” Oliver said.
Similarly, Bassanese said what likely happened is the President was put under “massive pressure” due to the “implosion” in both US equity and bond markets.
However, Bestashares’ economist warned the pause does little to ease pressure on the global economy, cautioning it still faces “enormous risk in the weeks and months ahead.”
“While equity markets bounced overnight, this may well be but one of likely several cruel bear market rallies in what had become a very oversold market in the short term. We’re not out of the woods just yet,” he said.
According to Bassanese, the risks to the global outlook remain for several reasons, including the still relevant “significant” increase in the average effective tariff rate to around 20 per cent.
“That still represents a significant hit to US inflation and economic activity sufficient to likely cause a US recession in their own right,” he said.
“What’s more, even the pause in tariffs leaves the global business community facing significant uncertainty in terms of the cost pressures that we’ll face in the months ahead – which will lead to a curtailment in both investment and hiring plans. It’s the uncertainty, with regard to eventual tariff levels, that is likely even worse for economic growth than the actual tariffs the US imposes.”
