Reserve Bank delivers first rate cut in four years
The RBA's 25bp rate cut signals economic recovery, with inflation trending toward target, but caution remains on future easing.
In a much-anticipated move, the Reserve Bank of Australia (RBA) announced today a 25 basis point cut to the cash rate, bringing the level of official interest rates down to 4.10%. This marks the first easing of monetary policy in over four years, signalling a pivotal shift in Australia’s economic landscape and suggesting that the economy has passed the bottom of the business cycle.
The policy change follows the release of the crucial December 2024 inflation data. In its post-meeting statement, the RBA noted that the inflation figures had bolstered its confidence that inflation was sustainably tracking towards the midpoint of its 2% to 3% target range. Recall that the RBA’s preferred underlying inflation measure, the trimmed mean CPI, rose by 0.5% in the December quarter, taking the annual rate down from 3.6% to 3.2%.
Despite the encouraging inflation trend, the RBA Board cautioned that risks remain. Notably, recent labour market data has been unexpectedly strong, suggesting that employment conditions may be tighter than previously assumed. Uncertainty about the outlook abroad also remains significant. More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slow growth in the economy and weak productivity outcomes.
While delivering the positive news of the rate cut, the Board refrained from providing clear forward guidance on the timing or scale of future rate cuts. The RBA has long maintained a cautious communication strategy, and this was reiterated in today’s statement: “while today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing.”
It is important to note that unlike many other central banks, the RBA did not hike rates aggressively during the tightening cycle, meaning rate cuts are also expected to be more gradual.
Chart 1: Headline and underlying (trimmed mean) inflation
Source: ABS Consumer Price Index
The destination for interest rates is also uncertain. On that score, the RBA will be watching upcoming labour market data closely. The January labour force survey, due in two days, and the February survey, scheduled for release on March 20, will provide critical insights ahead of the April Board meeting. But the most important sole data point will be March quarter inflation figures, due to be released at the end of April.
Governor Michele Bullock, Deputy Governor Andrew Hauser, and several Assistant Governors will testify before the House of Representatives Standing Committee on Economics in Canberra on February 21. This will offer the RBA an opportunity to comment on the December 2024 Wage Price Index and the January labour force survey. Unless there are significant surprises in this data, Governor Bullock is expected to maintain the cautious tone established in today’s post-meeting press conference.
The central bank has overall been careful to avoid signalling to households, businesses, unions, and politicians that inflation is completely under control. Such a message could spark a lift in spending, potentially reigniting inflationary pressures.
Moreover, the recent uptick in inflation in the United States, which has increased from 2.4% to 3.0% between September 2024 and January 2025, serves as a reminder that managing inflation in the final stages of a cycle can be particularly challenging.
This monetary policy shift also has broader political implications. The rate cut will accelerate the timing of the next federal election, which could be called as early as next week for either March 29 or April 5.
Deloitte Access Economics expects a further 50 basis points of cuts during 2025.
This newsletter was distributed on 18th February 2025. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Naasha Kermani, Senior Economist at Deloitte Access Economics
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