With the vast majority of the market betting the Reserve Bank of Australia would cut rates today, it comes as no surprise that the central bank has done just that, making a 25-basis point (bp) cut to bring Australia’s official interest rate to 4.10%.
The RBA pointed to cooling inflation in December as the core justification for the cut but cautions that upside risk remains.
Labour market numbers have been stronger than expected and the central forecast for underlying inflation, which is based on the cash rate path implied by financial markets, has risen a little over 2026.
“While today’s policy decision recognises the welcome progress on inflation, the board remains cautious on prospects for further policy easing,” the RBA’s statement on the cut read.
Inflation targets still on track
Despite the RBA’s caution, analysts are optimistic the Australian economy could reach its target earlier than expected.
Falling interest rates and lower inflation don’t mean the cost-of-living crisis is easing, however.
“These costs are now just rising at a slower pace and as such will continue to exert pressure on consumers’ budgets and business costs and will be a challenge for the Federal Government at the upcoming election,” CreditWatch chief economist Ivan Colhoun said.
“It’s likely the Governor will signal at her upcoming press conference that the war on inflation is not yet won, and as such a significant interest rate reduction cycle should not be expected at this time.
“That said, there will be keen focus on any clues as to what developments need to occur for a follow-up interest rate reduction and when that might be.”
Relief on horizon for mortgage holders
Even so, the lowered interest rates will ease pressures on mortgage holders, who will need to wait and see if their banks pass on the full 25 bp cut.
Finder.com’s research suggests those with a home loan of about $640,000 will save more than $100 a month should the cash rate cut be fully passed on.
“Now is the time to take action and review your home loan. After this rate cut, if your interest rate doesn’t start with a 5 – you’re paying too much,” Finder head of consumer research Graham Cooke said.
What about May’s meeting?
The consensus for May’s meeting is leaning toward another cut for now but in these times of uncertain geopolitics, forecasts can be unreliable.
More than half of analysts polled by Finder (64%) believe another cut is on the cards although most insist continued evidence of slowing inflation will be necessary before the RBA makes another move.
"Inflation is reportedly at its lowest level in three years and is on the cusp of the RBA's 2-3% target zone,” said digital lending firm WLTH founder Brodie Haupt.
“Many economists and experts earmark February as the potential start of a series of rate cuts."
Bendigo Bank head of economic and market research David Robertson agreed, stating: "The latest CPI data (especially core inflation) was more benign than expected, allowing the RBA to initiate the easing cycle in February.
“We expect at least three cuts to a more neutral cash rate of around 3.5% by November."
Others point to labour market shortages, inflation in the building industry and elevated core inflation as reasons to hold the cash rate, rather than continue to cut.
"It would be optimal to ensure that underlying inflation continues its trajectory and that the RBA's target is stable before reducing interest rates,” RMIT University economist Sveta Angelopoulos said.
“With uncertainty in the global environment given US policy and how it may impact Australia both directly and indirectly, it may be prudent to remain cautious and not move prematurely."