Australia’s central bank cut interest rates for the first time since 2020 as inflation approaches the top of its 2%-3% target, while signalling a cautious approach to any further easing.
The Reserve Bank lowered its cash rate by a quarter-percentage point to 4.1% on Tuesday, in a widely expected decision.
“If monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range,” the rate-setting board said. “In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook.”
The Australian dollar climbed after the decision to trade at 63.64 US cents (85 cents) at 2.35pm in Sydney while yields on the policy sensitive three-year government bond increased by 1 basis point to 3.89%.
The decision may provide a shot in the arm for Prime Minister Anthony Albanese as he seeks a second term in office in an election due by May 17. His ruling Labor party is trailing the opposition Liberal-National coalition in opinion polls and cost-of-living and housing have been among the top concerns for the electorate.
Governor Michele Bullock will hold her post-meeting press conference at 3.30pm Sydney time.
The RBA’s decision comes as President Donald Trump’s program — ranging from tariffs to tax cuts and immigration curbs — has added uncertainty to an already clouded global outlook, and economists say it has the potential to stoke US inflation. Federal Reserve Chair Jerome Powell has said the latest inflation data shows the central bank still has more work to do.
See also: EU targets €26 billion of US products in tariff retaliation
Economists in a Bloomberg survey expect two more rate reductions this year — similar to market pricing for the cash rate to end 2025 at 3.6%. That suggests the easing cycle will be fairly shallow given Australia’s rates don’t have as far to go to neutral, which has been estimated at around 3.5%.
There are tentative signs Australia’s economy picked up in the final three months of 2024 and that this momentum has been sustained in the new year, led by consumer spending. The labour market also remains a bright spot.
While low unemployment supports demand, economists say a monetary-fiscal split is complicating the RBA’s efforts to tame inflation. Government spending at both state and federal levels remains strong and is expected to rise further in an election year.
