The Reserve Bank of Australia (RBA) lowered interest rates for the first time in over four years on Tuesday, but cautioned that it was too soon to declare inflation under control, signalling a careful approach to further cuts.
While the reduction offers some relief to borrowers, it also benefits Prime Minister Anthony Albanese, who is gearing up for a challenging election no later than 17th May. Growing speculation suggests he might take advantage of the situation to call an early vote.
Concluding its February policy meeting, the central bank lowered the cash rate by 0.25 percentage points to 4.1%, marking the first cut since November 2020, when rates were slashed to a record low of 0.1% amid the pandemic crisis.
Markets had strongly anticipated the reduction after core inflation fell to 3.2% in the fourth quarter. However, swaps indicate only an 18% chance of another cut in April, while a May reduction remains nearly fully priced in, Reuters reports.
“While today's policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing,” according to a statement, adding that inflation risks remain due to a robust labour market.
“The Board’s assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate.”
The Australian Dollar dipped 0.1% to $0.6352, while three-year bond futures declined by 5 ticks to 96.08, as Governor Michele Bullock pushed back against market expectations of two additional rate cuts this year during her press conference.
“I want to be very clear that today's decision does not imply that future rate cuts along the lines suggested by the market are coming,” the governor said, who went on to define market pricing as “unrealistic.”
“The board needs more data that inflation is continuing to decline before making decisions about the future,” she added.
After indicating the possibility of a rate cut in December, the board cautioned that easing monetary policy too quickly or excessively could risk stalling the disinflation process.