Super-sized interest rate cut in May 'can't be ruled out'

A super-sized, 50-basis-point interest rate cut "can't be ruled out" when the Reserve Bank meets next month, according to one of Australia's leading financial institutions.

In a research note published this morning, AMP deputy chief economist Diana Mousina said a reduction from the current cash rate of 4.10 to 3.85 per cent at the RBA's May 20 is the most likely outcome.

However, if Donald Trump extends his tariffs and the current trade war continues to escalate, an even bigger cut to 3.60 per cent is possible, with more relief to follow later in the year.

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"We expect another 25 basis point rate cut in both May and August this year, with the cash rate ending 2025 at 3.6 per cent before eventually declining to 3.1 per cent in 2026 based on our inflation and growth forecasts," Mousina said.

"But, if the hit to Australian growth and financial markets is larger than expected from US and reciprocal tariffs, we may see a faster and more aggressive cutting cycle this year, with potentially four more rate cuts this year alone and a 50-basis-point rate cut can't be ruled out at the May board meeting as a form of insurance against any recession risks."

Even with the best part of six weeks until the next RBA meeting, financial markets are certain of at least 0.25 percentage points of relief, and are pricing in an 82 per cent chance of a cut double that size.

That's despite the Reserve Bank's monetary policy board not even discussing the possibility of a cut at its meeting last week, when rates were kept on hold at 4.10 per cent.

However, Trump's tariffs and the resulting escalation in trade tensions and volatility on global share markets have economists expecting several rate cuts from the central bank in an attempt to stimulate the local economy to avoid a financial downturn.

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"Australian GDP growth may slow a little if lower global trade growth harms Australian exports to non-US countries," Mousina wrote.

"The RBA may be forced to be more aggressive in reducing interest rates in the short-term if the threat to global growth worsens, the hard data deteriorates and there is a clearer sign of a recession or turmoil in financial markets," she added.

"But the triggers for this scenario have not been met yet, although we are getting close and money markets are starting to price in this risk."

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