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Highlights
- Inflation data fuels expectations for back-to-back RBA rate cuts
- July and August widely anticipated for easing moves
- ASX200 stocks gain momentum amid improving monetary landscape
With Australia’s inflation showing consistent signs of easing, expectations are growing that the Reserve Bank of Australia (RBA) will deliver consecutive interest rate reductions — a move that could boost confidence in equity markets, particularly among ASX200 stocks.
The May Consumer Price Index (CPI) revealed that inflation fell to 2.1% year-on-year, a notable drop from 2.4% in April and beating forecasts of 2.3%. This places headline inflation within the RBA’s target range of 2–3% for the first time since late 2024. The trimmed mean, considered the central bank’s preferred gauge of underlying inflation, also declined to 2.4% from 2.8%.
Market sentiment quickly adjusted, with interest rate futures showing a 96% probability of a July rate cut — significantly higher than the 84% odds prior to the CPI data. Until recently, analysts had projected the first cut to occur later in the year.
The economic picture paints a broader trend of deceleration. Key indicators — such as March quarter GDP growth and business conditions in May — have weakened, even as the labour market remains stable with a 4.1% unemployment rate holding steady for five consecutive months.
This moderation is prompting many economists to revise their projections. Forecasts now anticipate back-to-back cuts in July and August, potentially lowering the cash rate from its current 3.85% to 3.35%, and possibly to 3.1% by early 2026.
In the corporate sphere, the mood appears more optimistic. For instance, major listed names like Commonwealth Bank of Australia (ASX:CBA), National Australia Bank (ASX:NAB), and AMP Limited (ASX:AMP) are seen as closely linked to monetary policy shifts, as rate cuts can ease funding costs and improve lending conditions.
Services inflation also offers encouraging signs. It dropped to a three-year low of 3.3% in May, aided in part by seasonally influenced falls in travel costs. The declining inflation breadth — with fewer CPI categories now exceeding 3% — adds further weight to the argument for easing.
If realised, the RBA’s next moves would align Australia with global peers that have already begun reducing rates. With two rate cuts already implemented since February, the RBA appears poised to extend its easing cycle — an environment that could further support momentum in ASX200 stocks.
As the macroeconomic narrative continues to evolve, all eyes remain on the RBA’s July policy meeting, with the potential for it to shape the outlook across sectors and investor sentiment.
