Australia’s ASX 200 Pauses After Inflation Surprise as Rate Cut Bets Surge
The S&P/ASX 200 Index finished virtually unchanged at 8,559 on Wednesday, stabilizing after a strong 1% gain in the prior session, as investors absorbed a surprisingly soft inflation report and renewed hopes for monetary easing by the Reserve Bank of Australia (RBA). While the broader market stayed steady, underlying shifts in sector performance and shifting monetary expectations suggest a potential turning point for Australia’s economic trajectory heading into Q3 2025.
CPI Eases: Inflation Slows to 2.1%
Australia’s monthly Consumer Price Index (CPI) indicator revealed a significant moderation in inflation. Year-on-year, CPI rose 2.1% in May—down from a steady 2.4% pace seen over the prior three months and falling short of the consensus forecast of 2.3%. Importantly, core inflation (which excludes volatile items such as food and energy) eased to 2.4%, a notable decline from 2.8% in April, reaching its lowest level since November 2021.
This marks the first time in nearly two years that both headline and core inflation measures sit comfortably within the RBA’s target band of 2–3%, reinforcing growing market sentiment that disinflation is taking hold across the Australian economy.
These CPI results follow weaker-than-expected Q1 GDP data, which showed economic growth slowing more than anticipated. Together, the dual signals of sluggish growth and moderating inflation have emboldened bond markets and rate futures to anticipate a more dovish RBA stance in the months ahead.
Rate Cut Expectations Surge: 89% Odds for July
The combination of soft CPI and GDP data has significantly shifted rate expectations. Futures markets now price in an 89% probability of a 25-basis point cut in July, with a total of 73 basis points of easing projected by year-end 2025. This would take the cash rate from its current level of 4.35% to approximately 3.60%, marking a reversal from the aggressive hiking cycle seen in 2022–2023.
Economists at Westpac and ANZ have both revised their forecasts to align with this market consensus. According to Westpac, the “disinflationary trend is now undeniable,” and with growth slowing to below-trend levels, “monetary accommodation is warranted” (Westpac Economics, 2025).
Sectoral Divergence: Financials Rally, Commodities Drag
Within the ASX 200, sectoral movements on Wednesday were sharply bifurcated.
Financial stocks led gains, with Commonwealth Bank of Australia (CBA) rising 1.6% to a fresh record high and National Australia Bank (NAB) up 0.7%, reaching a four-month peak. Investors are increasingly bullish on the sector amid expectations that lower interest rates will boost credit growth while reducing default risk.
In contrast, mining and energy stocks underperformed, weighed down by softening global commodity prices. Concerns over Chinese demand and a fragile geopolitical ceasefire in the Middle East pushed iron ore, copper, and oil prices lower, dragging down sector leaders such as BHP Group and Woodside Energy.
Geopolitical Underpinnings: Israel-Iran Ceasefire Holds—For Now
Traders also responded to geopolitical headlines, particularly the US-brokered ceasefire agreement between Israel and Iran, which, while fragile, appears to be holding for the time being. Though the truce helped to stabilize risk appetite, there remains significant skepticism about the long-term durability of the peace deal. A breakdown in talks could reignite volatility in commodity markets and risk assets, especially for energy and defense-linked stocks.
Outlook: Australia at a Monetary Crossroads
The ASX 200’s flat close reflects a market in wait-and-see mode—positioned between optimism over easing inflation and concern over the real economy’s momentum. With the RBA’s July meeting now highly anticipated, investor focus will turn to the bank’s updated Statement on Monetary Policy, particularly any downward revisions to growth forecasts or changes in inflation expectations.
In the short term, financials and consumer discretionary stocks could outperform, supported by the prospect of rate relief. However, sectors tied to global growth and commodity demand may continue to face headwinds, especially if Chinese economic data remain weak or if Middle East tensions reignite.
Key Takeaways:
ASX 200 ended flat at 8,559 after 1% gain on Tuesday.
May CPI came in at 2.1% y/y vs. 2.4% prior, below forecast of 2.3%.
Core inflation slowed to 2.4% from 2.8%—lowest since Nov 2021.
Markets now price 89% chance of 25bps rate cut in July, and 73bps total cuts by year-end.
Financials led gains: CBA +1.6%, NAB +0.7%.
Mining and energy dragged on lower global commodity prices.
Geopolitical backdrop remains tense despite temporary Israel-Iran ceasefire.
Sources:
Australian Bureau of Statistics (2025) Monthly CPI Indicator, May 2025
Reserve Bank of Australia (2025) Statement on Monetary Policy – May Edition
Bloomberg Terminal Data (Accessed 25 June 2025)
Westpac Economics (2025) CPI Analysis Note – May 2025
Reuters (2025) Australian Market Wrap and Global Geopolitical Developments