The Reserve Bank of Australia cut interest rates by 25 basis points as the Australian dollar continues to fall.

Against the backdrop of escalating global uncertainty, the Reserve Bank of Australia has cut its benchmark interest rate for the second time this year, while maintaining a cautious policy outlook. The RBA on Tuesday lowered the benchmark rate by 25 basis points to 3.85%, hitting a two-year low, in line with market expectations. The Australian dollar fell by 0.5%, continuing its earlier decline, and the yields on three sensitive bonds fell by 7 basis points as traders increased bets that the RBA will ease policy in 2026. The currency market maintained expectations for the RBA to cut rates twice more before the end of the year. Chief Investment Strategist at Shenbao Bank, Charu Chanana, said, "Due to various uncertainties both globally and within Australia, the RBA announced a dovish rate cut. Uncertainty is a key theme in the statement not just in terms of geopolitics and trade, but also regarding how domestic demand, wages, and corporate pricing behavior will evolve in the future." Since the RBA's meeting on March 31 to April 1, data has shown inflation higher than expected, wages unexpectedly accelerating, and a surge in hiring, highlighting the RBA's cautious stance on the outlook. President Donald Trump's tariff plan has raised concerns about global growth prospects, further reinforcing this policy stance. Even though Australia may avoid direct impact from tariffs, as a small open economy, its economic activity and market sentiment are highly dependent on overseas activities and market sentiment. The RBA Committee stated, "There remains considerable uncertainty surrounding the ultimate scope of tariffs and the policy responses of other countries. Geopolitical uncertainty remains pronounced. It is expected that these developments will have an adverse effect on global economic activity, particularly as households and businesses defer spending until the outlook becomes clearer." Earlier this month, the center-left government in Australia won a landslide victory in elections. Both parties had proposed expansionary fiscal plans during the campaign, and S&P Global Ratings warned that if these commitments lead to structural deficits, increased debt, and interest costs, Australia's highly-regarded AAA sovereign credit rating could be at risk. Given the projected budget deficits in the coming years, the RBA will also closely monitor risks of inflationary rebound. The RBA also released its latest quarterly economic forecasts on Tuesday. The RBA currently expects that potential inflation will slow slightly faster most of the time over the forecast period, reaching near the midpoint of its 2-3% target range, while the labor market is expected to slightly loosen. This forecast assumes a cumulative rate cut of 85 basis points by mid-2026. The RBA stated, "The assumed cash rate path is expected to support economic activity in the face of global economic headwinds." The RBA does not publish dot plots or forecast rate trends, but uses market pricing as a reference for economic outlook. The RBA is trying to maintain labor market growth while slowing down price growth a delicate balance that has drawn some criticism. However, this strategy seems to be working, as core inflation returned to target levels for the first time in over three years last quarter, and the unemployment rate remains around 4%. The RBA Committee stated, "Inflation risks have become more balanced. Inflation is within the target range, and upside risks appear to have diminished as expected international developments will put pressure on the economy."