The Reserve Bank of Australia (RBA) has cut rates at this month’s meeting to 4.1 per cent.
For the first time in over four years, the RBA delivered a rate cut, reducing the rate from 4.35 per cent to 4.10 per cent, and joining its global peers in softening monetary policy in response to a decline in inflation.
The RBA last cut rates in November 2020, when the central bank reduced the rate from 0.25 per cent to a record low of 0.10 per cent to support the economic recovery from the COVID-19 pandemic.
In its statement on 18 February, the RBA said: “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 market had been pricing in a 90 per cent chance of 25-basis-point decrease, which several economists judged was too optimistic despite most aligning with the view that the bank would in fact cut.
Saxo’s chief investment strategist, Charu Chanana, said on 17 February: “The Australian Q4 CPI miss a few weeks ago has really prompted expectations that the RBA will cut this time around – although the labour market is still quite strong, so the RBA doesn’t need to be as aggressive.”
In a similar vein, Scott Solomon, co-portfolio manager at T. Rowe Price, predicted a 25-basis-point cut, stressing that not cutting would risk the RBA’s credibility, particularly given its emphasis on returning inflation to the 2–3 per cent target range.
Shane Oliver, chief economist at AMP, similarly forecast a 0.25 per cent cut, citing a growing confidence that inflation is sustainably returning to target.
February’s board meeting is the last time the RBA will meet in its current format, with the two-board system due to kick in from next month.
