Australia's central bank lowered its policy interest rate by 25 basis points to its lowest in two years as the country's inflation rate continues to retreat, giving banks room to ease monetary policy.

The Reserve Bank of Australia lowered the benchmark rate to 3.85%, the lowest level since May 2023, in line with Reuters' expectations for economists.

Australia's inflation rate has been on a downward trend, with the most recent title inflation figure at a four-year low of 2.4% in the first quarter of 2025.

The RBA said in a previous monetary policy statement that bringing inflation sustainably back to the 2% to 3% target “in a reasonable time frame” was its highest priority, although it also acknowledged that the outlook is uncertain.

Australia's economy also changed a bit, with recent GDP readings showing a year-on-year increase of 1.3% in the fourth quarter and marking its first expansion since September 2023.

However, analysts highlighted the downside risks to the Australian economy ahead of the RBA meeting due to global trade tensions and uncertainty in the domestic economy.

In his comments on May 16, HSBC analysts pointed out that "global economic and financial markets at their last meeting on April 1, including the "liberation day" tariffs by U.S. President Donald Trump, including the Royal National Collection since its last meeting on April 1.

Analysts predicted a “moderate negative growth impact” on the country and said the market shock could be slightly disinfected for Australia.

This is due to expected global growth and trade transfers from China to non-U.S. markets, including Australia.

Carl Ang, a fixed income research analyst at MFS Investment Management, pointed out on May 15 that downside risks and uncertainties around Australia's economic outlook have increased significantly due to "liberation day" and global trade policies.

He said it would likely prompt "a clear torture from the Royal Bank of Australia".

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