The Australian sharemarket finished higher last week, up 0.2%, as the Reserve Bank of Australia (RBA) announced its second 0.25% rate cut of 2025. RBA Governor Michele Bullock stated easing inflation and global uncertainties justified a shift to a more accommodative monetary policy stance. As a result, interest rate sensitive sectors enjoyed gains last week, as the Information Technology sector added 2.0%, while the REITs sector rose 1.0%. The Financials sector (0.9%) was also higher during the week, as Commonwealth Bank reached another all-time high to end the week at ~$173. Amongst the other banks, NAB added 1.9%, while ANZ lifted 0.6%.
US sharemarkets were lower last week, which trimmed gains from the prior weeks rally. Despite the loss last week, the S&P 500 is still up more than 16% since mid-April. Trade tensions re-appeared late in the week, after US President Trump threated the EU with further tariffs beginning on 1 June. In addition, Moody’s lowered the credit rating on US Treasuries, as they cited growing fiscal deficits as their main concern. The Information Technology sector (-3.5%) was amongst the worst performers, as the tech-heavy NASDAQ lost 1.1%. In particular, Apple declined 7.6%, while NVIDIA Corporation shed 3.0%. The Energy sector (-4.4%) was also weaker, despite the price of oil bouncing off of the lows seen at the beginning of May.
European sharemarkets also closed lower last week, as the STOXX 600 dropped 0.8%, following US President Trump's unexpected announcement of a 50% tariff on EU goods starting 1 June. In addition, support for a June European Central Bank rate cut increased, following slower wage growth and downgraded inflation forecasts. The Financial Services sector (-2.4%) weakened as bond yields fell, while the Automobile & Parts sector (-4.9%) was amongst the worst performers. However, European corporates showed resilience with their first quarter results, as 60% of the STOXX 600 beat earnings expectations.
The Reserve Bank of Australia (RBA) cut the cash rate by 0.25% in May, bringing it down to 3.85%. This marks the second cut in the current easing cycle and signals a more comfortable stance from the RBA regarding inflation, even as global uncertainties continue to loom.
What’s interesting is how broad the discussion was leading into the meeting. While markets largely expected the 0.25% cut, there were murmurs of a potential 0.50% jumbo move, which we now know was indeed considered. Ultimately, the central bank’s Board went with the smaller reduction, describing it as making policy “somewhat less restrictive.” The message? The door remains open for further easing.
The RBA’s tone has clearly shifted. The statement and Governor Michele Bullock’s press conference revealed a growing confidence in the inflation trajectory. Trimmed-mean inflation forecasts were nudged down slightly from 2.7% to 2.6%, and the outlook for wages and GDP growth was softened. Inflation is now seen as more balanced in terms of risks, thanks in part to energy rebates and moderating global demand.
At the same time, the RBA remains wary of global headwinds, particularly the ongoing fallout from US tariffs under US President Donald Trump’s new trade policy. These developments have contributed to a weaker outlook for Australian growth and employment. Despite a surprisingly strong April jobs report (+89,000 jobs vs the expected +17,500), the Board decided that downside risks warranted a rate cut. The labour market remains tight, but inflationary pressure from wages appears to be easing.
From a forecasting perspective, GDP growth has been downgraded from 2.4% to 2.1% for year-end, with household consumption also tracking lower than expected. This reinforces the RBA’s decision to act sooner rather than later.
Market reaction to the interest rate cut was swift. Bond yields fell after the announcement, particularly once it became clear the Board had debated a larger cut. Three-year Australian treasury bond yields dropped from 3.64% to 3.48% and the Australian Dollar weakened around 0.84% to US$0.640 on the day. Investors now expect between two and three more cuts before year-end, with growing speculation about a potential move as early as July. As such, we expect to continue to see a reduction to term deposit rates offered by banks.
Altogether, this rate cut may be less about today’s data and more about managing tomorrow’s risks. The easing bias is firmly intact, and if economic clouds continue to gather, the RBA appears ready to act. In the meantime, mortgage holders can sleep a bit easier with another interest rate cut in the bank.
Domestically, investors will be keeping a close eye on the monthly Consumer Price Index and Retail Sales results.
Internationally, Consumer Confidence results will be released in the Eurozone and the US, while in the UK, Nationwide Housing Prices will be announced.
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