Markets still leaning towards July rate cut, despite inflation uptick

Financial markets currently believe there’s nearly a 70% chance of another rate cut from the Reserve Bank of Australia at its next meeting in July, despite stronger-than-expected monthly inflation numbers.

However, markets have pared back their expectations of rate cuts this year, now fully pricing in only two more cuts of 0.25% each by November, instead of three.

Nevertheless, its clear economic momentum is moving towards a lower interest-rate environment, which is already boosting the housing market.

The details

The Australian Bureau of Statistics says its main inflation measure, the monthly Consumer Price Index (CPI) indicator, rose 2.4% in the 12 months to April 2025.

This headline measure of inflation was unchanged from the previous month and slightly above market expectations of 2.3%.

The ABS says the largest contributors to the annual movement were Food and non-alcoholic beverages (+3.1%), Housing (+2.2%), and Recreation and culture (+3.6%).

“We saw expected rises in health insurance premiums and international travel,” says Commonwealth Bank Senior Economist Stephen Wu.

“Larger price increases in some goods will likely be unwound, as has typically been the case.”

However, Stephen Wu says the main surprise in the inflation numbers was an unexpected increase in new housing costs.

“Since August last year, a clear downtrend has been sustained as home builders have responded to weak demand by offering promotions and incentives,” he says.

“But with the start of the RBA’s interest rate cutting cycle since February, expectations around home price growth have sharply increased.”

Stephen Wu points out that new construction data also shows residential building activity continuing to lift.

“And the RBA’s liaison insights suggest homebuilders are expecting to see a boost in home sales post-Federal election and as further interest rate cuts are expected to be delivered,” he says.

Core inflation

The RBA has made it clear it looks beyond the headline CPI rate and concentrates on core measures when pursuing its mandated target of maintaining inflation in Australia in a 2-3% band.

The ABS data shows the RBA’s preferred “trimmed mean” inflation measure actually ticked up slightly in April, from 2.7% to 2.8%.

However, Commonwealth Bank economist Stephen Wu says he’s “not overly concerned and anticipates that in May we will see a material decline in the annual trimmed mean measure.”

Money markets

Some weeks ago, money markets were confident the RBA would cut interest rates again at its next meeting in July, but in the immediate aftermath of the inflation figures, only around 50% of traders were confident this would still be the case.

However, with continuing uncertainty about US President Donald Trump’s tariff policies and possible implications for Australia, traders are now pricing in a 68% chance of a rate cut in July.

Commonwealth Bank’s Stephen Wu is more cautious.

“So far, there’s been no smoking gun for the RBA to deliver another 25bp cut in their July meeting,” he says.

“We maintain our base case that the RBA will want to deliver further cuts in a cautious way, and that the domestic data for now will evolve in such a way to enable that.”

Nevertheless, the retail interest rate team at Australia’s largest bank appears more confident that we are heading into a period of sustained lower interest rates than the bank’s own economic forecasters.

CBA has just slashed fixed-rate home loans for new customers by up to 0.40%.