The Reserve Bank of Australia cut interest rates for the first time in more than four years on Tuesday but warned it was too early to declare victory over inflation and was cautious about the possibility of further easing.
The rate cut will provide some relief to borrowers and will be good news for Prime Minister Anthony Albanese, who faces a tough election on May 17 at the latest. Speculation is growing that Albanese may use this opportunity to call for early elections.
The Reserve Bank of Australia (RBA), which completed its February policy meeting, cut the cash rate by a quarter percentage point to 4.1%, the first cut since November 2020, when the pandemic crisis pushed interest rates to an all-time low of 0.1%.
Markets had largely bet on a quarter-point cut after core inflation surprised to the downside at 3.2% in the fourth quarter. Swaps pointed to only an 18% probability of the next cut in April, but a move in May is still almost fully priced in.
‘While today’s policy decision acknowledges the welcome progress in inflation, the Committee remains cautious about the prospects for further policy easing,’ the Committee said, noting that upside risks to inflation persist due to the strong labor market.
‘The Committee’s assessment is that monetary policy is restrictive and will remain so after this reduction in the cash rate.’
The Australian dollar fell 0.1 percent to $0.6352, while three-year bond futures fell 5 ticks to 96.08 as Governor Michele Bullock retracted market pricing of two more rate cuts this year at the press conference.
‘I want to be very clear that today’s decision does not mean that future rate cuts will come along the lines suggested by the market,’ said Bullock, who later described market pricing as “unrealistic.”
‘The Committee needs more data that inflation continues to fall before making decisions about the future,’ he added.
The board, which opened the door to a rate cut in December, warned that the decline in inflation could stall if monetary policy was loosened too much too soon.
