The CFO Pulse > June 2025

Economic weakness to spark more interest rates cuts from the RBA

In reaction to inflation being on target and the downside risks to global and Australian economic growth from the tariff-induced slowdown, the RBA delivered a second interest rate cut in the current cycle. The cash rate is now 3.85 per cent, down from the peak of 4.35 per cent which was in place until February 2025.

The RBA also updated its forecasts for the economy with the revised outlook signalling further interest rates in the months ahead. Compared to the February 2025 forecasts, the outlook for economic growth and inflation were revised lower, while expected unemployment is higher.

While a so-called ‘hard landing’ for the economy remains unlikely, the RBA noted that the extent of the dislocation to global trade from the tariff wars was expected to be negative for growth and inflation and, if the effects were significant, would add to the case for interest rate cuts in Australia.

This was confirmed with the March quarter GDP data which was disappointing from all angles. Economic growth was a paltry 0.2 per cent in the March quarter for a similarly unimpressive 1.3 per cent in annual terms. A small rise in household spending was accompanied by broadly flat outcomes for business investment, net exports and even government demand

Recent inflation data for April was encouraging for those looking for further interest rate reductions. In the year to April, inflation was 2.4 per cent with the trimmed mean rate at 2.8 per cent, both within the RBA 2 to 3 per cent target band.

The labour force data were more resilient with the unemployment rate holding at 4.1 per cent, a level that has been evident for the best part of a year. Some of the unexpected strength in the labour market is due to a surge in public sector jobs (aged care, teachers, nurses and other carer economy workers) which has masked, to some extent a slide in growth in private sector employment. With job vacancies falling, there remains a strong probability of higher unemployment over the medium term.

Globally, the tariff issue remains at the forefront. While it is impossible to be sure how the issue resolves itself, the likes of the IMF and OECD have revised global economic growth rates lower in both 2025 and 2026 specifically on the back of the tariff issue.

In the US, there is elevated concern that the tariff issue and economically irresponsible tax policy from the Trump administration will cause market difficulties. US bond yields have spiked higher as a result and are threatening to undermine the effort of the US Federal Reserve to support the economic with interest rate reductions.

New Zealand

After a deep recession in 2024, the recovery in New Zealand is gaining traction, largely on the back of the significant reduction in interest rates from the RBNZ. That said, the recovery remains relatively subdued. This is in part because of the fragile growth rate in Australia (New Zealand’s major trade partner) and caution surrounding the effect of the international trade disruptions, especially in the US and China.

The RBNZ cut interest rates by 25 basis points in May, taking the cash rate to a cyclical low of 3.25 per cent. The cut was based on the modest economic recovery and expectations for lower inflation. Given the quantum of interest rate cuts in the past 18 months, markets remain cautious about further cuts given the lags involved in changes in monetary policy and the impact on economic conditions.

Currencies

The NZD has generally sustained its relative strength versus the AUD, with the AUD / NZD cross holding around 1.07 to 1.08, compared with a range around 1.10 for much of 2024. In currency markets, there remains a trend to USD weakness as markets reprice economic risks from the domestic policy risks. This has seen the AUD track around 65 US cents, with the NZD around 60.25 US cents.