RBA interest rates: Deutsche Bank tips mega cut in May

A big investment bank reckons a super-sized interest rate cut is coming next month as panicked markets up their bets on rate relief despite concerns about inflation.

Deutsche Bank tipped the Reserve Bank of Australia would lower the official cash rate by 50 basis points at the meeting in mid-May, which would take the benchmark rate to 3.6 per cent.

Another two cuts would follow later in the year to take the rate to 3.1 per cent, acting as a shield against US President Donald Trump’s trade war.

That’s unless Mr Trump finds an off-ramp and pivots, Deutsche economist Phil Odonaghoe said. Reporting has shown wide and wild inconsistency from the Trump administration as to the chances of a walk back.

Financial markets were also pricing in a likely double cut at the upcoming meeting.

The Reserve Bank had held the cash rate steady earlier this month, warning inflation was not yet under control and concerns of high uncertainty from the trade storm.

Mr Odonaghoe said in a Tuesday note that an aggressive RBA response was “appropriate and consistent with precedent”.

“This is one of the few occasions in history where a global ‘shock’ outweighs prevailing domestic economic considerations,” Mr Odonaghoe said.

The Australian dollar dipped below 60 US cents yesterday, but Mr Odonaghoe said the RBA would ignore the move as it had done during the Global Financial Crisis and Covid-19.

“A weaker currency could feed through to higher imported consumer prices, but we expect that would take a year, at least, and only if it is sustained,” he said.

“And it will be offset by weaker prices stemming from a likely massive redirection of manufactured consumer goods over coming months from the US to other (non-tariff) consumer markets like Australia.”

But earlier this week, Judo Bank’s Warren Hogan warned against expecting quick relief because tariffs would add to global inflation.

“Central banks need to tread carefully here,” he said.

“There will be loud calls for emergency rate cuts, and other actions to support weak markets, but that is not their job.

“Unless the market fallout jeopardises the underlying economy, central banks need to be mindful of bailing out investors, particularly as inflation is lurking in the economy and is a direct consequence of tariffs.”