The treasurer and shadow treasurer have both applauded the Reserve Bank’s decision to cut the cash rate to 4.1%, with bipartisan support for the move that offers a reprieve to mortgage-saddled Australian households.
But the RBA governor, Michele Bullock, cautioned that the decision to cut was not a “lay-down misère” and that the board had an active debate over the issue.
“Today’s decision does not imply that further rate cuts along the lines suggested by the market are coming,” she said, referring to economist forecasts of several cuts this year.
Bullock said there were still risks that inflation would increase again.
“While today’s policy decision recognises the welcome progress on inflation, the board remains cautious on prospects for further policy easing.”
The decrease is the first since the early days of the Covid-19 pandemic, and has arrived just in time for the Labor government to campaign on its economic credentials before an election to be fought on cost-of-living policies.
Economists view the decision as a sign that Australia’s central bankers believe inflation is being tamed.
A household with a $750,000 loan will see their monthly repayments fall by $115 if their mortgage rate falls by 25 basis points, in line with the cash rate decision, according to Canstar analysis.
Election footing
The RBA decision comes amid a turbulent period for incumbent governments, which have been falling around the world amid voter frustration about elevated inflation and rising living costs.
The treasurer, Jim Chalmers, described the rate decrease as “very welcome news” for millions of Australians, and a demonstration of the progress made against inflation.
“This is the rate relief that Australians need and deserve,” Chalmers said.
“Now, we know that it won’t fix every challenge we have in our economy and household budgets, but it will help.”
The shadow treasurer, Angus Taylor, told the ABC the cut was “welcome relief”. He criticised the government for overseeing a period of collapsing living standards in an “unprecedented way”.
The RBA painted a picture in its monetary policy statement accompanying the rate decision of an economy giving out mixed signals, raising questions about whether the economy needed stimulating through lower borrowing rates.
On the one hand, the jobs market is tight, and there are no immediate signs that there will be a sharp increase in unemployment, according to the statement. At the same time, mortgaged households are under sustained pressure, and watching their spending closely.
Bullock said that the strongest argument against a rate cut was the strength of the jobs market.
“We have a view that the labour market is tight and also that it has tightened recently,” she said.
Against that backdrop, the central bank opted to cut the cash rate to bring the level back towards the “neutral rate”, which the RBA concedes is a difficult number to identify.
The move unwinds the last hike, in November 2023, but falls short of an aggressive “pivot” that may have indicated the RBA was confident of delivering a series of rapid-fire cuts.
It acknowledged that mortgaged households have endured a prolonged period of high borrowing costs.
“The rise in household interest payments since 2022 has put pressure on household budgets, which has contributed to weak consumption growth over the past few years and an increase in housing loan arrears to around their pre-pandemic levels,” the RBA said in its policy statement.
The RBA last cut rates in November 2020 as a stimulus measure designed to combat the fallout from the pandemic. A subsequent period of inflation led to 13 rate hikes.
Australia’s big lenders, the Commonwealth Bank, Westpac, National Australia Bank and ANZ, immediately announced they would pass on the full 25 basis point cut to their variable loan customers.
Tariff fallout
The central bank’s forecasts have core inflation, its preferred measure that removes volatile prices and government-subsidised measures, falling faster than previously expected, and expected to stabilise at about 2.75% from late this year.
It acknowledges, however, that there was a “high degree of uncertainty” about the policies of the Trump administration and how they would affect the global economy.
The US’s new tariff regime is widely viewed as inflationary, given consumers will pay for increases in the cost of global goods, upsetting the anticipated rate-cutting cycle.
Tony Sycamore, an IG Australia market analyst, said the RBA’s outlook sounded cautious.
“The forecasts published today suggest that if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range,” Sycamore said.
“In removing a little of the policy restrictiveness in its decision today, the board acknowledges that progress has been made but is cautious about the outlook.”
Central bank watchers have warned that people should not expect an avalanche of cuts because of lingering concerns about inflation and the fallout from US tariffs.
