RBA Eases as Global Risks Mount, Boosting Appeal of Australian Bonds
The Reserve Bank of Australia’s (RBA’s) recent 25 basis point (bp) cut to 3.85%, its second reduction this year, was widely expected. However, the dovish tone in the RBA’s accompanying statement surprised markets, marking a clear shift from the more cautious rhetoric at the April meeting when rates were held steady and there was no clear commitment to further easing.
The RBA has revised down its forecasts, with trimmed mean inflation now expected to ease to 2.6% by year-end, near the midpoint of its 2%–3% target range (see Figure below). Meanwhile, the unemployment rate forecast has edged up to 4.3%, closer to estimates of the non-accelerating inflation rate of unemployment (NAIRU), suggesting the labour market is nearing equilibrium. Growth projections have also been trimmed by 30 bps to 2.1%.
Headline and core inflation now comfortably within the RBA’s target range
This forecast for softer growth, inflation moderating to target, and a labour market in balance paves the way for further easing towards a neutral policy stance. The RBA even considered a more aggressive 50 bp cut, highlighting how low the bar now is for additional rate reductions.
We believe the neutral cash rate in Australia sits between 2.5% and 3%, which points to at least three or four more 25 bp cuts, likely spaced quarterly. However, if global recession risks intensify, a faster and deeper easing cycle cannot be ruled out.
What does global policy uncertainty mean for portfolios?
Elevated policy uncertainty has rattled markets, fuelling volatility across asset classes and casting doubt on the sustainability of the U.S. exceptionalism theme that has underpinned markets in recent years. The term “U.S. exceptionalism” refers to the country’s superior growth and productivity relative to other economies—a dynamic now facing short-term and possibly long-term headwinds.
In the short term, the U.S. economy is grappling with a significant tariff-driven supply shock, as well as heightened policy uncertainty that will weigh on investment and sentiment. These headwinds have prompted us to revise our expectations for U.S. growth down to between 0.5% and 1% for the calendar year, a marked slowdown from previous expectations in the low twos. This growth rate approaches a potential “stall speed,” where economic momentum risks faltering.
In response to these evolving risks, our portfolio positioning reflects a cautious and diversified approach. We have increased duration exposure outside the U.S., particularly in Australia and the U.K., where disinflationary pressures from trade tensions may provide a more supportive backdrop. Our yield curve positioning favours steepeners, reflecting expectations that increased fiscal spending globally will push up term premia at the long end of interest rate curves.
We have shifted credit exposure up in quality and prefer securitised assets over generic corporate credit. In foreign exchange markets, we maintain a short U.S. dollar bias, primarily against a defensive basket including the euro and yen, reflecting concerns about U.S. policy and fiscal uncertainty.
Amid this global turbulence, Australia stands out as a potential beneficiary. Its stable political environment, robust rule of law, and transparent governance make it an attractive destination for capital flows, reinforcing the appeal of Australian fixed income in a diversified portfolio.
Why fixed income deserves a place in Australian portfolios today
With high-quality fixed income offering starting yields in the 6% to 7% range, we believe investors have a compelling opportunity to strengthen portfolios. These assets provide attractive and resilient income streams in a world of falling cash rates and provide a crucial hedge against the elevated volatility expected to persist in global markets.
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