The Reserve Bank of Australia (RBA) decided that it was "not yet time to move monetary policy to an expansionary stance," given that inflation was yet to return sustainably to the midpoint of its target range and the staff's assessment that the labor market was still tight, minutes from its May meeting showed on Tuesday.

The central bank lowered the official cash rate by 25 basis points to 3.85% in its monetary policy meeting in May, as inflation continued to moderate, while flagging a still-tight labor market and global uncertainty. It noted that its members judged that a lower cash rate would "be an appropriate response to the downside risks that had emerged from international developments since the previous meeting."

Labor market conditions remained in line with the previous forecasts, while wage growth increased slightly in the March quarter, but remained lower than a year earlier. "Members welcomed the broad-based easing in underlying inflation over the preceding year," the meeting showed. Underlying inflation returned to the 2% to 3% range.

The board said "future decisions will be guided by the incoming data and the evolving assessment of risks," as it seeks to respond to prevailing global policy uncertainty.

The tariffs announced by the administration of US President Donald Trump in April "had been much higher than expected" and led to retaliation in kind by China. At the time of the meeting, the tariffs were still well above previous levels, and future tariff decisions remained highly unpredictable.

Longer-term government bond yields in advanced economies initially declined following the tariff announcements but were generally higher than at the time of the previous meeting, especially in the US. The Australian dollar was volatile, depreciating sharply in early April before rebounding. On a trade-weighted basis, the Australian dollar was around the same level as it was in late 2024.

The members "noted that policy unpredictability had created a highly uncertain environment, depressing sentiment measures in several developed economies outside Australia," according to the minutes.

The members also considered a range of alternative scenarios for how the Australian economy might evolve under different policy assumptions in the unpredictable global policy environment.

Market expectations for future monetary policy in Australia moved markedly lower for a time in early April before retracing their steps since then. The market pricing implied a total of around three 25 basis point reductions in the current year, a little more than expected at the time of the previous meeting.