TD Securities reads the RBA May Minutes as pointing to a pause in the near term, with markets pricing a low chance of a June rate rise. Overnight index swaps put the odds of a June hike at 20%.
The Minutes say the Board sees financial conditions as somewhat restrictive after the May 25 basis point increase. The cash rate is described as likely near or above the RBA’s estimate of the nominal neutral rate.
Inflation Expectations In Focus
The Board notes higher short-run inflation expectations, linked to rising fuel costs and reports from its liaison programme. It also records that a larger share of consumer-facing firms expect above-average price increases over the next year.
TD Securities expects another rise in August, based on upcoming CPI data that may show broader price pressures. It also notes that a temporary cut in fuel excise duty is expected to reduce annual CPI inflation in April by 0.5 percentage points in the next monthly report.
We see the recent Reserve Bank of Australia minutes reinforcing a preference to stay on the sidelines for now. This view is shared by the market, with pricing that suggests a rate hike at the upcoming June meeting is very unlikely. The immediate outlook points towards a period of stability in the cash rate.
This cautious stance is understandable given recent data we have seen. Looking at the numbers from earlier in 2025, the Westpac-Melbourne Institute Consumer Sentiment Index for April dipped to 82.4, showing households remain pessimistic. This, combined with the modest 0.4% rise in March retail sales, gives the Board reason to pause and assess the impact of its previous hikes.
Why August May Matter
The Board’s main concern, however, is the rise in short-term inflation expectations. We believe the impact of higher fuel costs is starting to create broader price pressures across the economy. This underlying inflation risk is the key factor to watch beyond the June meeting.
This concern is validated by business surveys we are monitoring closely. For instance, the April 2025 NAB Business Survey indicated that purchase cost growth remains elevated, with price increases still well above their pre-pandemic averages. This signals that firms are still facing significant input cost pressures, which will likely be passed on to consumers in the coming months.
Given this outlook, we expect the August meeting will be the focus for another rate increase, especially after the temporary effect of the fuel excise cut fades from the CPI data. Derivative markets may be underpricing the probability of a hike later in the third quarter. Traders could therefore consider positions that benefit from a repricing of rate expectations for August and September.
We saw a similar dynamic when looking back at the hiking cycle in 2023, where the RBA paused in April only to resume hikes as inflation proved more persistent than anticipated. That historical precedent from just two years ago suggests a pause does not rule out further tightening if the data demands it. This supports our view that the RBA will act again once inflation reports confirm these broader pressures.
