The Reserve Bank of Australia cut interest rates as expected on Tuesday, citing some progress towards bringing down inflation, but warned that further monetary easing still hinged on more downside in inflation.
Separately, the RBA also forecast some improvement in local economic growth in its forecasts for the year.
The RBA cut its cash rate target to 4.10% from 4.35% in its first rate cut since 2020.
Tuesday’s decision comes following data in January that showed Australian consumer price index inflation cooled in the fourth quarter of 2024, giving the RBA some headroom to lower rates.
But inflation still remained well above the RBA’s 2% to 3% annual target, keeping the central bank hawkish with regards to future rate decisions.
The RBA flagged these risks on Tuesday, stating that recent strength in the labor market may underpin inflation in the coming months.
“While today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing,” the RBA said in a statement.
The central bank noted that Australian economic growth had weakened, while local demand was also recovering less quickly than expected. Softer economic conditions were also a motivating factor behind Tuesday’s cut.
The central bank reiterated that “sustainably returning inflation to target within a reasonable timeframe” remained its biggest priority, adding that monetary policy remained restrictive despite Tuesday’s cut.
RBA sees improving growth; inflation to remain sticky
In a separate statement, the RBA said it expected Australian gross domestic product growth to pick up in 2025, amid improving private consumption and easing interest rates.
But the central bank warned that the pick-up in private demand will be a bit slower than initially expected, due to slower household spending.
GDP is forecast at 2% by June 2025.
Australia’s labor market is also expected to remain strong amid high vacancies and limited supplies of skilled workers.
On the inflation front, the RBA said that consumer prices are expected to moderate slightly faster than initially expected. But underlying inflation is still expected to remain above the central bank’s target range by end-2025, and will only fall sustainably within the range by 2026.
The RBA warned of a near-term pick-up in inflation, especially as several cost-of-living policies from the government, such as electricity subsidies, are lifted this year.
