The Reserve Bank of Australia (RBA) announced a rate cut of 25 basis points, bringing the cash rate down to 4.10% on Tuesday. This move marks the first rate reduction since November 2020, signaling the bank’s concern over domestic economic uncertainties. Despite lagging behind other major global central banks that began easing late last year, the RBA’s decision aligns with market expectations. Recent rallies in government bonds had already anticipated this interest rate cut.
The RBA’s decision is influenced by multiple factors, including the persistently strong labor market. The unemployment rate lingered around a historic low of 4.0% as of December, posing a challenge to further rate cuts. However, inflation has shown signs of easing, with a 12-month rate of 2.4% through December, comfortably within the RBA’s medium-term target of 2% to 3%. The consumer price index increased modestly by 0.2% on a quarter-on-quarter basis, supporting the bank’s confidence in a steady decline in inflation as noted in its December policy meeting.
RBA’s Caution Despite Progress on Inflation
The central bank had maintained its policy rate at 4.35% since November 2023 after implementing 13 consecutive rate hikes aimed at controlling domestic inflation. With the recent rate cut, yields on Australian 10-year government bonds fell by nearly 20 basis points to 4.450% on Tuesday. Meanwhile, the ASX 200 index experienced a decline, shedding 0.6%, while the Australian dollar strengthened slightly by 0.22% to 0.6340 against the U.S. dollar.
“There are notable uncertainties about the outlook for domestic economic activity and inflation. The central projection is for growth in household consumption to increase as income growth rises. But there is a risk that any pick-up in consumption is slower than expected,” – RBA
The RBA has expressed caution despite the positive progress on inflation, as reflected in the statement from its board members.
“While today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing,” – RBA board members
Market analysts anticipated the interest rate cut, noting a rally in government bonds in recent weeks. This anticipation reflects investors’ expectations that the central bank would react to the gradual easing of inflationary pressures and economic uncertainties with monetary policy adjustments.
Author’s Opinion
While the rate cut is a positive move towards managing inflation, the RBA’s cautious tone indicates that the economic landscape remains uncertain. It will be essential for the RBA to continue monitoring inflation and economic growth closely to avoid the risk of pushing the economy too hard with further rate cuts.
Featured image credit: FMT
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