With inflation easing, the Reserve Bank of Australia (RBA) is set to begin a short series of interest rate cuts, starting with a 0.25% reduction to 4.10% on Tuesday, as expected by the majority of economists in a Reuters poll.
This would mark the RBA's first rate cut in more than four years, aligning it with the rate-cutting cycles started by other major central banks last year, though the US Federal Reserve has already paused its cuts due to inflation concerns.
Australia's inflation dropped to 2.4% last quarter, well within the central bank’s target range of 2-3%, prompting several economists to move up their expectations for a rate cut from the April-June quarter to 18th February.
With a slight dip in economic growth and easing inflation, economists believe the need for policymakers to keep rates in restrictive territory for an extended period has lessened, Reuters reports.
While moderating inflation supports one aspect of the RBA's mandate, the strength of the labour market and persistent wage inflation reduce the urgency for the central bank to take aggressive action. Additionally, a strong housing market does not necessitate lower rates.
In a poll conducted between 6th – 13th February, 40 out of 43 economists expect the RBA to reduce its official cash rate by 25 basis points to 4.10% at the conclusion of its two-day policy meeting on 18th February. The remaining three economists forecast that rates will remain unchanged.
In a January poll, just over 40% of economists had predicted the RBA would cut rates on Tuesday. However, interest rate futures are now pricing in nearly an 80% probability of that happening.
“The prudent action for the RBA now would be to cut, but cut slowly and just see how data evolves through time. The worst thing they could possibly do is cut hard and then have to reverse. That's the clear risk case for them,” stated Craig Vardy, head of fixed income at BlackRock Australasia.
All major local banks, ANZ, CBA, NAB, and Westpac, expect a 25-basis point rate cut on Tuesday and forecast cumulative cuts of 50-100 basis points this year.
Moreover, 31 out of 41 respondents predict another quarter-point reduction in the April-June quarter, bringing rates down to 3.85%.
Average forecasts suggest that the interest rate will fall to 3.60% by the end of September. This is expected to be followed by a prolonged pause until at least early 2026, with a total of 75 basis points in rate cuts throughout this cycle.
“They've pretty much got the green light to go from an inflation standpoint. We think probably three rate cuts perhaps this year and the risk is we only get two. But getting towards a 3-1/2% nominal neutral level - that's probably where they'll end up,” Vardy added.
This is significantly lower than the expected 250 basis points of rate cuts from the Reserve Bank of New Zealand and 150 basis points from the US Federal Reserve, both of which began cutting rates last year.
According to a separate Reuters poll, inflation is expected to average 2.8% this year, with the economy projected to grow by 2.0%.