The Reserve Bank of Australia (RBA) has cut interest rates by 25 basis points to 4.10% on Tuesday, marking the central bank's first rate easing since November 2020. This decision aligns with market expectations and comes in response to easing inflationary pressures and ongoing economic uncertainties. The shift highlights the RBA's cautious approach amidst a strong labor market and a declining inflation rate.
The RBA's recent move follows a prolonged period of monetary tightening, during which it implemented 13 rate hikes to combat inflation. Despite maintaining its policy rate at 4.35% since November 2023, the RBA decided to lower rates as inflation showed signs of slowing. Over the past year, inflation eased to 2.4%, falling within the RBA's medium-term target of 2% to 3%. The consumer price index rose by a modest 0.2% in the December quarter, slightly below the projected 0.3%.
The strength of Australia's labor market has been a significant factor in the RBA's monetary strategy. The unemployment rate has remained near a historic low of 4.0% since December, which has contributed to the cautious pace of rate cuts. In its last policy meeting, the RBA expressed confidence in the declining inflation trend, paving the way for this week's decision.
"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 global economic landscape has seen major central banks initiating easing cycles since late last year, with the RBA being relatively slow to follow suit. However, Tuesday's rate cut reflects a measured response to evolving economic conditions.
Financial markets reacted swiftly to the RBA's announcement. The yields on Australian 10-year government bonds fell nearly 20 basis points to 4.450%, continuing a rally spurred by anticipation of a rate cut. Conversely, the ASX 200 index extended its losses, decreasing by 0.6%. Meanwhile, the Australian dollar strengthened by 0.22% against the U.S. dollar, reaching 0.6340.
"While today's policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing," – RBA board members