Australia’s central bank cuts rates for first time in four years

The Reserve Bank of Australia lowers rates but warns against premature easing amid inflation concerns.

A man smokes near the Reserve Bank of Australia headquarters in central Sydney, Australia, on February 6, 2018. Photo by Daniel Munoz/Reuters

By Alana Salsabila and Clarisa Sendy

The Reserve Bank of Australia (RBA) has lowered interest rates for the first time in over four years, offering relief to borrowers but maintaining a cautious stance on future rate cuts. The central bank reduced the cash rate by 25 basis points to 4.1% following its February policy meeting, marking the first rate reduction since November 2020, when rates were slashed to historic lows amid the pandemic crisis.

RBA signals caution despite rate cut

Despite the rate cut, the RBA warned it was too soon to declare victory over inflation and signaled that further reductions may not be immediate. The central bank’s decision was largely expected after core inflation eased to 3.2% in the fourth quarter, moving closer to the RBA’s target range of 2-3%.

"While today's policy decision recognizes the welcome progress on inflation, the Board remains cautious on prospects for further policy easing," the RBA stated, citing concerns about upside risks to inflation due to a strong labor market.

The Australian dollar slipped 0.1% to $0.6352, while three-year bond futures fell 5 ticks to 96.08 as RBA Governor Michele Bullock pushed back against market expectations for multiple 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," Bullock said in a press conference, calling current market pricing “unrealistic.”

Political implications ahead of elections

The rate cut comes at a critical time for Prime Minister Anthony Albanese, who faces a challenging election no later than May 17. Speculation is growing that Albanese could call an early election, leveraging the rate cut as a boost to consumer confidence.

Treasurer Jim Chalmers welcomed the decision, stating it was a “welcome step” toward economic relief for Australians.

"This is the soft landing we have been planning for and preparing for, but we know there’s more work to do," Chalmers said at a press conference.

Australia lags global easing cycle

Compared to other central banks, the RBA has been slower to ease monetary policy, with major economies like the U.S. Federal Reserve pausing their rate cuts. Across the Tasman Sea, New Zealand’s central bank is expected to implement another 50-basis point cut on Wednesday.

Australia’s inflation trajectory has differed from global trends, with price pressures picking up later than in other major economies. In the fourth quarter of 2024, inflation slowed to 2.4%, returning to the RBA’s target band. The trimmed mean inflation measure also fell to 3.2%, and analysts project it could decline to 2.7% by June 2025, remaining at that level until mid-2027.

Impact on the economy and labor market

Economists see the RBA’s rate cut as more of an adjustment to monetary policy rather than a sign of aggressive easing.

“The 25-basis-point reduction in the cash rate to 4.10% is more akin to easing pressure on the economic brake rather than tapping on the accelerator,” said Gareth Aird, head of Australian economics at Commonwealth Bank of Australia.

He noted that Australia’s low unemployment rate, which remained at 4.0% in December, allows the RBA to move gradually in adjusting monetary policy. However, he did not rule out a potential follow-up 25-basis-point reduction in April, especially if labor market conditions weaken.

The RBA remains cautious about inflationary pressures stemming from a strong labor market, where unemployment is projected to rise only slightly to 4.2%. Consumer spending has picked up, partly due to government tax cuts, and public sector growth forecasts have been revised upwards. These factors suggest the economy does not urgently require consecutive rate cuts.

Housing market and banking sector reactions

Tuesday’s rate cut is expected to have a positive impact on Australia’s housing market, where prices have declined from record highs in recent months. However, affordability challenges remain, posing a political challenge for Albanese’s government.

Australia’s "Big Four" banks—Commonwealth Bank, Westpac, ANZ, and NAB—lowered their interest rates by 25 basis points in line with the central bank’s decision.

Future outlook for RBA policy

Analysts remain divided on how aggressive the RBA’s easing cycle will be.

Capital Economics senior APAC economist Abhijit Surya expects the RBA to cut rates only twice more in the current cycle, citing concerns over lingering inflationary pressures.

"Taken together with the RBA’s expectation for a recovery in household consumption and broader economic activity, the Bank believes that some upward inflation pressures will likely persist into the medium term," Surya said.

Despite the rate cut, the RBA remains focused on inflation management, and future decisions will depend on incoming economic data and labor market conditions. As Australia navigates the economic recovery, all eyes will be on whether the central bank signals additional easing in the coming months.