The Reserve Bank of Australia (RBA) is located in the central bank building in Sydney, Australia on May 2, 2022.
Brendon Thorne | Bloomberg | Getty Images
The Reserve Bank of Australia cut benchmark interest rates for the first time in over four years on Tuesday, eventually joining its rankings with other major global central banks.
The RBA cuts the 25 basis rate to 4.10%, marking its first easing since November 2020.
“While today’s policy decisions recognize the progress of welcome on inflation, the board is cautious about the outlook for further policy easing,” RBA board members said in a statement.
The statement stated that it intends to gently maintain the central bank’s intention to “maintain further withdrawal of financial restrictions.” According to Abhijit Surya, senior APAC economist at Capital Economics.
As the RBA blew a hawkish tone, Surya predicts that the ongoing mitigation cycle will be “short-lived” and tightens the pencil with just two rate reductions in the current cycle, locking the terminal cash rate at 3.60% I did.
The central bank had stabilized its policy rate at 4.35% since November 2023, following a long period of 13 rate hikes to tame inflation.
Tuesday’s decision was in line with market expectations, with government bonds rallying in recent weeks in hopes of interest rate cuts. Australia’s 10-year government bond yields have fallen 4.450% from almost 20 basis points since January 13th, Tuesday, January 13th, according to LSEG data.
The RBA is behind the major global central banks that began their easing cycle late last year.
At its final policy meeting in December, the central bank said it was confident that inflation was declining and that it could ease its policy at some stage.
Australia’s inflation rate over the 12 months leading up to December quarter has been eased to 2.4%, as data from the Australian Bureau of Statistics shows. The RBA has fixed medium-term inflation targets between 2% and 3%.
Inflationary pressures are “a little faster than expected,” the RBA said Tuesday, gaining confidence that inflation is “to be sustainable” towards the midpoint of its target range.
One factor that has kept the cash rate drop is the strength of the labor market, with unemployment rising near the historic low level of 4.0% in December. “Some of the recent labour market data is unexpectedly strong, suggesting that the labour market may be slightly thinner than previously thought,” the RBA said.
The reduction in borrowing costs is a shot in the arms for the Labour government as they prepare for this year’s tough election amid slowing economic growth.
The country’s seasonally adjusted gross domestic product rose 0.3% in the September quarter, but annual growth slowed to 0.8% from 1.0% in the last quarter, the lowest rate since the pandemic.
“There is significant uncertainty about domestic economic activity and inflation outlook. The central forecast is that household consumption growth will increase as income growth increases. However, consumption pickup is more than expected. There is a risk that it will be late too,” he said in a statement Tuesday.
The Australian dollar has been slightly bolstered against the US dollar. The ASX 200 Index extended its losses on Tuesday, pouring 0.54%.
