Well, they did it! The Reserve Bank of Australia Board decided, at its meeting conducted over the past two days, to cut its official cash rate by 25 basis points to 4.10%, after having held it at 4.35% since November 2023, and having raised it by 425 basis points over the preceding 18 months.
Today’s move was almost universally anticipated by financial markets, and by most economists (although both had moved all over the shop during 2024).
It was prompted (as I foreshadowed here on 29 January) by the most recent inflation data, which (as the RBA Board said today) “suggests inflationary pressures are easing a little more quickly than expected”, and which, together with “continued subdued growth in private demand” and wage pressures having (also) “eased a little more than expected” (despite the labour market being “somewhat tighter than previously thought”, gave the Board “more confidence that inflation is moving sustainably towards the midpoint of the 2-3% target range”.
The Board was however at pains to downplay any suggestions that there will be further cuts in interest rates to follow any time soon, noting that “it remains cautious on prospects for further policy easing”.
Reflecting that caution, although the RBA staff revised down their forecasts for “underlying” (trimmed mean) inflation this year (to 2.7%, from 3.0%, over the year to the June quarter, and to 2.7%, from 2.8%, over the year to the December quarter), they revised their forecast for “underlying” inflation over the year to the December quarter 2026 in the opposite direction, from 2.5% to 2.7%.
That was the mechanical consequence of assuming — as by convention they do — that the cash rate will fall in line with “market pricing” to 3.6% by the end of this year, and to 3.4% by the middle of next year. The conclusion to be drawn from this — given the heightened importance which the RBA now attaches to the mid-point of its target range — is that the cash rate won’t fall in line with current “market pricing”.
I suspect that the new Monetary Policy Committee — which will take over the task of setting interest rates from the Board from the beginning of next month — will elect to wait until it has seen the March quarter CPI data (to be released on 30 April) before deciding whether to cut rates again. Which means that there probably won’t be a rate cut emanating from the MPC’s first meeting on 31 March and 1 April, but rather will most likely come from the meeting to be held on 19-20 May (which is, incidentally, after the last day on which the forthcoming federal election can be held, 17 May).
There are four other reasons why I think the RBA won’t cut rates as much as its peers (the Fed, the BoE, the BoC and the RBNZ) have done.
First and most importantly, they didn’t put them up as much as their peers did (the US Fed funds rate peaked at 5.38%, the BoE’s bank rate at 5.25%, the BoC’s at 5.00%, and the RBNZ’s at 5.50%);
Second, fiscal policy is turning expansionary – after two consecutive budget surpluses, the Federal budget will be in deficit this year, and for the following eight years, on the most recent projections, and that largely reflects a shift in the structural budget balance (note, the RBA will almost certainly not point publicly to this as a factor in its decision-making, but it will be relevant nonetheless);
Third, it expects the labour market to remain tight — it lowered its forecasts for the unemployment rate at the end of this year, the middle of next year and the end of next year from 4.5% to 4.2% — which, combined with Australia’s on-going lousy productivity growth rate, implies that “unit labour cost growth remains high”; and
Fourth, the suite of policies being pursued by the Trump Administration and the Republican majorities in Congress will likely result in higher US inflation, and potentially higher inflation in other countries including Australia. The RBA’s Statement on Monetary Policy doesn’t say this explicitly – even though it mentions the word “tariffs” 52 times, and devotes a special two-page “box” to the “Implications of US Policy Settings for Financial Markets”, in which it notes that the tariff announcements have had only “modest impacts on financial markets to date”.
Tuesday’s announcement will save mortgage borrowers with the average new mortgage (of just under $650,000) just over $100 per month – with the prospect (if the RBA follows up with further cuts in May and August) of a further $200 per month in savings of repayments.
Whether the announcement prompts the prime minister to call an election sooner than he absolutely has to — and what impact it might have on voting intentions — remains to be seen.
Saul Eslake worked as an economist in the Australian financial markets for more than 25 years, including as Chief Economist at McIntosh Securities (a stockbroking firm) in the late 1980s, Chief Economist (International) at National Mutual Funds Management in the early 1990s, as Chief Economist at the Australia & New Zealand Banking Group (ANZ) from 1995 to 2009, and as Chief Economist (Australia & New Zealand) for Bank of America Merrill Lynch from 2011 until June 2015.