RBA rate cut provides ‘a sigh of relief’, but businesses still on edge

Another cut to the cash rate has provided Australian businesses with a temporary “sigh of relief”, but challenges still await amid geopolitical uncertainty.

The Reserve Bank of Australia decided back in February to cut the cash rate by 25 basis points, from 4.35 per cent to 4.1 per cent – the first cut to the rate since November 2020.

Now, after holding at 4.1 per cent through the April meeting, the board of the RBA decided to yet again cut the cash rate by 25 basis points from 4.1 per cent to 3.85 per cent, providing relief for many Australians battling costs in what has been volatile economic conditions since the COVID-19 era.

“The RBA’s cut to interest rates by 25 basis points this afternoon [20 May] reflects the softer outlook for inflation, as the cost-of-living crisis has begun to ease,” said Dr Isaac Gross, economics lecturer at Monash University.

This was echoed in the original statement presented by the board: “Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance.

“Data on inflation for the March quarter provided further evidence that inflation continues to ease. At 2.9 per cent, annual trimmed mean inflation was below 3 per cent for the first time since 2021, and headline inflation, at 2.4 per cent, remained within the target band of 2–3 per cent.”

Despite the good news, Employment Hero chief executive Ben Thompson urged businesses across the country to remain cautious in their approach, claiming that “cracks” are beginning to show.

“The RBA cutting the cash rate to 3.85 per cent is huge – this is the first time in two years we’ve seen interest rates starting with a ‘3’. Everyday Aussies and businesses can breathe a sigh of relief knowing that costs are starting to cool – but underneath that, the real economy is starting to show cracks,” said Thompson.

“If we want wage growth to stick without stoking inflation, we need more than rate cuts. The conversation must shift toward productivity – starting with reducing red tape, lowering compliance burdens, and empowering businesses to invest in better ways of working.”

Innes Willox, chief executive of the Australian Industry Group (Ai Group) followed Thompson’s sentiment, lamenting Australia’s “economic performance”.

“Our own economic performance has been far from stellar, with growth, business investment and household spending all recently weak. Recent OECD research found that Australian real household incomes fell by 1.8 per cent in 2024 – the worst result of any OECD economy,” said Willox.

“Meanwhile, many of our structural economic problems – of stagnant productivity, chronic housing and skills shortages, and rising public debt levels – remain in place.”

Willox also touched on the uncertainty ahead for Australian businesses considering geopolitical unrest.

“Trump’s trade wars loom over the global economy. While temporary suspension of tariffs is welcome news, it simply implies less rather than no damage from this paroxysm of protectionism. The RBA notes that uncertainty alone can itself slow economic activity if households and businesses defer major decisions,” said Willox.

“The RBA has downgraded its forecast for growth, inflation and employment through to the end of 2026 due to these global downside risks.”

The uncertainty and unpredictability manifest a “stay-on-your-toes” approach for businesses that – despite the RBA relief – are far from out of the woods.

Although Gross predicted further cash rate cuts would arise throughout the rest of the year, he, too, highlighted the potential fallout that Trump’s tariffs could impose.

“We currently expect two further cuts over the remainder of the year. However, this outlook is highly contingent on two major factors: the continued moderation of inflation and the potential impact of Donald Trump’s trade policy,” said Gross.

“Should Trump re-commit to radically higher tariffs, we would almost certainly see a large reduction in interest rates. On the other hand, the chance for further cuts could evaporate if inflation stays stubbornly high, which remains a real risk given the strength of recent job numbers and wage growth data.”