RBA Cuts Rate For First Time in 4 Years
- Brett Careedy
- Feb 18
- 4 min read
The RBA delivered the rate cut that the market was pricing today. But lower unemployment, higher growth, and higher inflation forecasts imply that the RBA might not expect any more cuts this year.
Today, the RBA Board decided to lower the cash rate target by -0.25% to 4.10% and the interest rate paid on Exchange Settlement balances (bank reserves) to 4.0%, as widely anticipated.
Better inflation results were a key reason for the cut. The governor said in her statement: "In the December quarter underlying inflation was 3.2 per cent, which suggests inflationary pressures are easing a little more quickly than expected. There has also been continued subdued growth in private demand and wage pressures have eased. These factors give the Board more confidence that inflation is moving sustainably towards the midpoint of the 2–3 per cent target range."
But it's too early to call victory as the PM has suggested: "However, upside risks remain. Some recent labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat tighter than previously thought. The central forecast for underlying inflation, which is based on the cash rate path implied by financial markets, has been revised up a little over 2026. So, while today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing".
Heightened uncertainty is a theme in the governor's statement: "Growth in output has been weak, private domestic demand is recovering a little more slowly than earlier expected, and there is uncertainty around the extent to which the recovery in household spending in late 2024 will persist [..] At the same time, a range of indicators suggest that labour market conditions remain tight and, in fact, tightened a little further in late 2024 [...] There are notable uncertainties about the outlook for domestic economic activity and inflation [...] More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slow growth in the economy and weak productivity outcomes while conditions in the labour market remain tight [...] Uncertainty about the outlook abroad also remains significant. Geopolitical and policy uncertainties are pronounced and may themselves bear down on activity in many countries if households and firms delay expenditures pending greater clarity on the outlook".
The section on the policy outlook was substantially rewritten from December: "Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority [...] The Board’s assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate. Some of the upside risks to inflation appear to have eased and there are signs that disinflation might be occurring a little more quickly than earlier expected. There are nevertheless risks on both sides.
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. 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.
The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions [...]".
S&P/ASX200 8,490 -0.6%, AUDUSD 0.6343 -0.2%, Aus 2yr 3.84% -1bp, Aus 10yr 4.46% +1bp
Fin-X Wealth View
The RBA cut for two main reasons today; better inflation outcomes in late 2024 and an unwillingness to go against market pricing with such a high degree of uncertainty in the outlook.
However, the governor did push back against the market pricing of future cuts. The SMP states that the current market-implied cash rate path is likely to see higher underlying inflation outcomes in 2026. The RBA clearly doesn't want to see this, so the implication is that the Reserve Bank expects maybe one more cut in 2025, or perhaps none at all.
That said, the high degree of uncertainty, particularly surrounding the US policy outlook, means that the RBA will respond as the facts evolve. We continue to expect higher volatility in global yields.
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