The Reserve Bank of Australia on Tuesday cut benchmark interest rates for the first time in over four years, joining ranks with other major global central banks, as softening inflation allows room for easing policy.
The RBA cut rates by 25 basis points to 4.10%, according to its statement on Tuesday. This marked the RBA’s first easing since November 2020, when the central bank cut its key rate to a record low, as it battled a slowing economy during the pandemic.
“While today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing,” the RBA board members said in the statement.
The central bank had held its policy rate steady at 4.35% since November 2023, following an extended period of 13 rate hikes to tame inflation at home.
The Tuesday decision was in line with market expectations, with government bonds rallying in recent weeks on anticipation of an interest rate cut. The yields on Australian 10-year government bonds dropped nearly 20 basis points since Jan. 13 to 4.450% on Tuesday, according to LSEG data.
The RBA has lagged behind major global central banks that kicked off an easing cycle late last year.
In its last policy meeting in December, the central bank said it was more confident that inflation was declining and that might allow it to ease policy at some stage.
Australia’s inflation over the 12 months through the December quarter eased to 2.4%, compared with 2.8% in the 12 months through September quarter, the Australian Bureau of Statistics data showed.
The RBA has pegged its medium term inflation target between 2% and 3%. On a quarter-on-quarter basis, the consumer price index rose 0.2% in the quarter ending December, softer than the forecast 0.3%.
One factor holding back the cash rate’s descent has been the strength of the labor market, with unemployment rate hovering near a historic low level of 4.0% in December.
A cut in borrowing costs would also be a shot in the arm for the Labor government which prepares for a tough election this year, amid sluggish economic growth.
“There are notable uncertainties about the outlook for domestic economic activity and inflation. The central projection is for growth in household consumption to increase as income growth rises. But there is a risk that any pick-up in consumption is slower than expected,” RBA said.
Australian dollar strengthened 0.22% on Tuesday to 0.6340 against the U.S. dollar. The ASX 200 index extended losses on Tuesday, shedding 0.6%.
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Source: CNBC