The Reserve Bank of Australia (RBA) cut interest rates for the first time in over four years, providing relief to borrowers, according to Reuters.
The move also gives a potential boost to Prime Minister Anthony Albanese ahead of an election due by May 17.
The RBA reduced the cash rate by 25 basis points to 4.1%, marking the first cut since November 2020, when rates were slashed to a historic low of 0.1% during the pandemic. The decision followed a surprise downside in core inflation, which fell to 3.2% in the fourth quarter of 2023.
However, the RBA warned that it was too early to declare victory over inflation and expressed caution about the prospects of further easing.
The Board’s assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate.
While markets had heavily anticipated the cut, swaps indicate only an 18% probability of a follow-up reduction in April, though a move in May is almost fully priced in. The RBA board emphasised that while the rate cut reflects progress on inflation, upside risks remain due to a strong labour market.
Governor Michele Bullock reinforced the cautious stance during her press conference, pushing back on market expectations of two additional rate cuts this year.
I want to be very clear that today’s decision does not imply that future rate cuts along the lines suggested by the market are coming. The board needs more data that inflation is continuing to decline before making decisions about the future.
Inflation and labour market concerns
Inflation in Australia, which peaked later than in other economies, has returned to the RBA’s target band of 2-3%, with the trimmed mean measure slowing to 3.2% in the last quarter. The RBA expects this measure to fall to 2.7% by June and remain there until mid-2027.
However, the central bank remains wary of inflationary pressures from a robust labour market, where the unemployment rate held steady at 4.0% in December and is projected to rise only slightly to 4.2%. Consumer spending has also picked up, supported by government tax cuts, while public spending growth has been revised upward, suggesting the economy does not urgently require consecutive rate cuts.
The rate cut is positive news for Albanese’s government, which faces a challenging election campaign. It also provides some relief to the housing market, where prices have declined from record highs in recent months, though affordability remains a significant issue.
Australia’s “Big Four” banks—Commonwealth Bank, Westpac, ANZ, and NAB—all reduced their interest rates by 25 basis points in line with the RBA’s decision. Treasurer Jim Chalmers welcomed the cut as a “welcome step” in providing relief to Australians, though he acknowledged that more work is needed to ensure a soft economic landing.
