Will the RBA Cut Interest Rates in May?

There’s growing speculation that the Reserve Bank of Australia will cut interest rates in May. In fact, the Commonwealth Bank has gone as far as calling it a ‘done deal’. But is that optimism premature? We've seen similar confidence before, only for the RBA to hold firm in the face of global uncertainty.

Still, the stock market may be offering the clearest signals—and as always, money tends to move before policy does. So, what should you watch?

What indicators are signalling that interest rates will fall?

Equity sector rotation

When rate cuts are on the horizon, capital often flows into growth-oriented sectors. On the ASX, this typically means Materials, Energy and Technology, while more defensive sectors like Consumer Staples tend to lag. This week, that rotation is playing out—Materials, Energy and Tech are leading, while Consumer Staples is lagging. If that trend strengthens, it’s a strong signal.

Real Estate Investment Trusts (REITS)

REITs are highly sensitive to interest rate moves. Cheaper capital usually translates to higher investment and asset values. However, REITs have yet to show any meaningful momentum. That’s notable—back in 2019, they rallied months ahead of rate cuts. The lack of movement now could reflect broader market weakness, but it’s something to keep on your radar.

Financial Sector

This sector is on the move. Banks benefit from increased lending activity, which typically precedes rate cuts. Before the 2020 rate drop, Financials surged in advance—eventually gaining over 50 per cent in a year. Their current strength might be the most telling clue yet.

If this momentum continues, a May rate cut could be more than just talk—it could be the relief households have been waiting for.

What were the best and worst-performing sectors last week?

The best-performing sectors included Financials, up 2.77 per cent, followed by Information Technology, up 2.09 per cent and Healthcare, up 2.07 per cent. The worst-performing sectors included Consumer Staples, up 0.33 per cent, followed by Communication Services, up 0.53 per cent and Utilities, up 1.15 per cent.

The best performing stocks in the ASX top 100 included Paladin Energy, up 22.20 per cent, followed by Telix Pharmaceuticals, up 11.17 per cent and Resmed Inc, up 7.35 per cent. The worst-performing stocks included Northern Star Resources, down 6.76 per cent, followed by Lynas Rare Earths, down 6.22 per cent, and Evolution Mining, down 5.56 per cent.

What's next for the Australian stock market?

Buyers continued their charge on the All-Ordinaries Index last week, pushing it up by more than 2 per cent—a move we haven’t seen since November 2024, nearly six months ago. Now, one strong week doesn’t make a trend, but every trend must start somewhere.

Adding fuel to the rally is the shift in sentiment around Donald Trump’s recent political manoeuvring. His hardline stance appears to be softening. The threat to sack Jerome Powell has been walked back, and his aggressive tariff position on China now seems negotiable—potentially even facing cuts without China offering much in return. That reversal in tone has sparked optimism, bringing bullish momentum back into the market.

Technically, the market found support at the key 7,500-point level—a spot that’s proving to be a solid floor. Combine that with Trump’s backpedalling, and we may well be looking at the low for the year. If this continues, the recovery could resemble the sharp rebound we saw post-COVID, rather than a slow, drawn-out climb.

That said, the next critical test is the 8,200 level. Buyers will need to break through that resistance with conviction. If they do, the rally could accelerate. But if price stalls and we see a lack of buyer follow-through, especially before reaching 8,400 points, it could signal the market’s not quite ready. We’d then be in for more sideways action before the next leg up.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.