The S&P/ASX 200 Index (ASX: XJO) is up 0.5% in afternoon trade as investors mull the prospects of a May interest rate cut from the Reserve Bank of Australia (RBA). This sees the benchmark Aussie index up 6.1% since the recent 7 April closing low.
As you're likely aware, the RBA opted to keep interest rates on hold at 4.10% at its last meeting on 1 April. That decision followed the central bank's 0.25% rate cut on 18 February as inflation began to pull back to its 2% to 3% target range.
This brought Australia's official cash rate down from 4.35%, where it had been stuck since November 2023, and offered some reprieve for many ASX 200 shares.
The next chance we have for easing comes when the RBA meets again on 20 May. And money markets are fairly optimistic the central bank will deliver a full 0.50% cut, with the ASX RBA rate tracker indicating a 79% expectation of an interest rate decrease to 3.60% at the next meeting.
But are investors being overly optimistic?
Here's what the RBA's minutes, released after market open today, tell us.
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Can ASX 200 investors expect an RBA interest rate cut next month?
With inflation slowing and a global trade war looming, there's a lot of pressure on the RBA to further reduce interest rates in May.
Especially as their previous decision to hold came a day before US President Donald Trump unveiled his 'Liberation Day' tariffs targeting more than 70 countries across the world. Australia was hit with 10% duties.
Today's published minutes from the meeting noted:
All central banks had acknowledged the heightened and ongoing uncertainty surrounding both the scope and potential impact of US trade policies. Members noted that expectations for policy rates in the United States and Canada had eased over prior months. Central banks in both countries had communicated downside risks to growth and upside risks to inflation from US tariffs
In a more promising sign for ASX 200 investors hoping for a May interest rate cut, the RBA said, "While overall financial conditions in Australia had eased a little with the cut in the cash rate target in February, members' assessment was that they were still restrictive."
The minutes also stated, "So far, the economy appeared to be tracking in line with the staff's forecasts, which were for underlying inflation to return to the 2-3 per cent range from mid-2025 before settling a little above the midpoint."
As for the decision to keep rates on hold until at least 20 May, the RBA said:
In finalising the policy statement, members emphasised the need to be cautious and alert to the evolving economic outlook, and the importance of future decisions being guided by the incoming information and the assessment of risks.
They agreed that sustainably returning inflation to target is the Board's highest priority and that it will do what is necessary to achieve that outcome.
Will they cut, or won't they?
In today's fast-moving world, a lot can still change between now and 20 May.
But many analysts believe the RBA will move to cut interest rates next month, which should provide some support for the ASX 200.
According to Josh Gilbert, market analyst at eToro:
[RBA Governor Michele] Bullock has affirmed the Australian financial system is well placed to absorb shocks from the global market – which some may question – but more importantly, she stated that the central bank's focus 'remains on our dual mandate for price stability and full employment'.
A lot has changed globally since the RBA's rate decision, in which Bullock arguably took a more hawkish stance than expected. Market pricing now shows rates dropping to 2.8% by the end of 2025.
For now, a rate cut in May looks firmly on the table, especially as the fight between the two largest nations continues.
