The Reserve Bank of Australia lowered the cash rate by 25 basis points to 3.85% today following its May meeting. Not the bumper rate cut we all thought might eventuate, but a cut nevertheless. Here’s what the RBA called out as key risks within its current forecast period.

By the numbers

First, the all-important numbers.

Following the 25bps rate cut announcement at 2:30pm AEST, the market gently pivoted back northwards from 8325 points to close at 8343 points. Overall for the session the market saw a gain of just over 0.5%.

Materially, the cut - if fully-passed on by banks - should help ease the cost of living for many Australians. In March 2025, the average Australian variable loan balance was around $666,000 nationally. That amount is financed at an average rate of 5.97%. That works out to an average repayment of $3981 a month.

If that average Australian saw their bank pass on the rate cut in full, they'd be looking at a $3874 repayment, putting a little over $100 a month back in their pocket.

Of course, those consumers may just be swayed by banks who are currently looking to grow their margins and gain a little more certainty by cutting fixed loan rates last week.

Thankfully, the national boogeyman of inflation is back inside the target band for the first time in years, and today’s rate cut reflects a policy pivot for the watch-and-see RBA board, but it’s not a green light for growth.

Beneath the Board’s decision lies a deepening concern about demand, productivity, and global risk. 

Here’s what the RBA is watching most closely.

1. Consumers are pulling back on spending way harder than expected

After a long period of elevated inflation, Australian households are finally seeing relief. 

Headline CPI inflation came in at 2.4% for the March quarter, while trimmed mean inflation (the RBA’s preferred core measure) fell to 2.9%, its lowest level since 2021. But relief hasn’t translated into renewed economic confidence for Aussies just yet. 

The RBA noted that household spending is growing more slowly than previously forecast, citing signs of consumer caution and suppressed demand. Disposable incomes are improving as real wages rise, but savings buffers are thin, and households remain highly-leveraged.

2. Everyone’s watching Trump’s next move

The RBA is closely watching rising international volatility, triggered by a mix of escalating tariff tensions, geopolitical instability, and slowing global trade. In a nutshell, it’s the Trump effect spooking the RBA Board. 

While financial markets rebounded following recent tariff announcements, the central bank made it clear: “there is still considerable uncertainty about the final scope of the tariffs and policy responses in other countries.”

These global developments have already impacted the overall outlook for growth, inflation and employment in Australia. 

With world trade and investment flows weakening, and China still facing structural headwinds, the RBA sees conditions that historically lead to slower capital expenditure, reduced hiring, and flatter earnings.

3. Weak demand means businesses are at risk

Although inflation has fallen, it hasn’t been replaced by pricing strength for businesses. In fact, some sectors are now struggling to pass on cost increases, pointing to soft underlying demand.

Input cost pressures (the cost of the stuff it takes for them to make something to sell) remain high, especially in retail and hospitality where margins are now really being squeezed. Businesses report that customer price sensitivity remains elevated (see point 1) and that sales volumes haven’t meaningfully improved (again, point 1).

This imbalance matters: it signals that demand is not yet strong enough to support a sustained recovery, despite lower inflation. It also limits earnings growth and puts pressure on future hiring and investment decisions. 

4.Strong employment numbers hiding weaker productivity problems

The RBA acknowledges that employment growth remains strong and labour underutilisation is still near multi-year lows. But the underlying picture is more complex.

The bank notes that while wages growth has softened modestly over the past year, productivity growth has failed to improve. The result? Unit labour costs remain high, which could entrench inflationary pressure if demand unexpectedly rebounds.

Data from the ABS shows that in the year to December 2024, labour productivity fell by 0.9%, while the Wage Price Index rose 3.9%. That means businesses are paying more for each hour an employee works but not getting the return on that investment into their businesses (see point 3).

The RBA will certainly keep an eye on this mismatch. 

5. We live in ‘interesting’ times

Traders are always trying to learn what’s about to happen tomorrow. With market-sensitive news happening at what feels like the speed of light in 2025, the RBA is conscious that risks are everywhere.

RBA Governor Michelle Bullock has always repeated that the Board is data-driven. It’s not about to take its hands off the wheel because we got a few good inflation numbers. 

It’s keeping an eye on household consumption, drags on growth and the labour market. Pressures are still happening everywhere in the Australian and global economies.