Australia’s central bank on Tuesday cut interest rates for the first time in more than four years, as inflation pressures began to show signs of easing more quickly than expected.
The Reserve Bank of Australia cut its cash rate by 0.25 percentage points to 4.10 per cent in what governor Michele Bullock said was a carefully balanced decision given the country’s tight labour market and global uncertainty caused by US President Donald Trump’s trade war.
“We cannot declare victory on inflation yet,” she said, adding that the bank was alert to the risks of cutting “too much, too soon” and questioning market views that it could enact three further reductions this year.
The rate cut, the RBA’s first since November 2020, came as Australia prepares for a nationwide election against a backdrop of elevated costs of living.
The central bank has been under pressure to begin easing its monetary policy, with some economists warning that the strain of higher borrowing costs on mortgage holders could push the country into recession.
In a statement, the RBA said it would retain a restrictive policy. “While today’s policy decision recognises the welcome progress on inflation, the board remains cautious on prospects for further policy easing,” it said, noting that other central banks, including the US Federal Reserve, have slowed their pace of rate cuts in recent months.
Australia is due to hold an election by mid-May, but Prime Minister Anthony Albanese has yet to set a date. Political strategists had seen a rate cut as a critical moment ahead of the polls.
Jim Chalmers, Australia’s Treasurer, welcomed the move as “the rate relief Australians need and deserve”, but that it was not yet “mission accomplished”, noting: “It won’t solve every problem in our economy or in household budgets but it will help.”
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The cut on Tuesday began the process of reversing a run of 13 rate rises since May 2022. The RBA, which was more cautious in raising rates two years ago, has also been slower to begin reducing them, and the move came as other central banks have shifted to a more hawkish stance as inflation has persisted.
But economists had pencilled in the long-awaited cut after official data released last month showed headline inflation in Australia fell to 2.4 per cent in the December quarter from 2.8 per cent in the previous three months.
The upcoming election is expected to be contested over the cost of living and the Labor government’s economic management.
The country’s largest banks committed to passing the rate cut on to mortgage holders. Bullock said she understood that thousands of Australians were “hurting” as a result of the RBA’s rate caution, but said the central bank’s focus remained getting goods and services inflation under control, adding: “That’s hurting you, too.”
Andrew Grant at the University of Sydney Business School said the rate cut would ease some of the pain of the cost of living for Australians, particularly those holding large mortgages. “Anything that puts a few dollars back in people’s pockets each month is going to be a huge relief.”
Gareth Aird, an economist with Commonwealth Bank, said it would have been a “harder sell” for the RBA to hold rates, with inflation trending lower and wage growth cooling.
He added that the timing ahead of the election had created an unusually “emotionally charged” environment around the rate decision.
The central bank had held rates at 4.35 per cent since November 2023 over concerns about inflation, which has remained above its target range of 2-3 per cent.
The RBA’s preferred “trimmed mean” measure of inflation, which excludes volatile factors such as petrol prices, dropped to 3.2 per cent year on year in the December quarter, from 3.6 per cent in the previous quarter.
