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Australia’s central bank on Tuesday cut interest rates for the first time in more than four years, as inflation pressures began to show signs of easing more quickly than expected.
The Reserve Bank of Australia cut its cash rate by 0.25 basis points to 4.10 per cent.
The move, the RBA’s first since November 2020, came as Australia prepares for a nationwide election against a backdrop of elevated costs of living.
The central bank said in a statement, however, that it would retain a restrictive policy due to the strength of the jobs market and an uncertain global economic outlook.
“While today’s policy decision recognises the welcome progress on inflation, the board remains cautious on prospects for further policy easing,” the RBA said, noting that other central banks, including the US Federal Reserve, have slowed their pace of rate cuts in recent months.
The Australian central bank has been under pressure to begin easing its monetary policy, with some economists warning that the strain of higher borrowing costs on mortgage holders could push the country into recession.
Australia is due to hold an election by mid-May, but Prime Minister Anthony Albanese has yet to set a date. Political strategists had seen a rate cut as a critical moment ahead of the polls.
Jim Chalmers, Australia’s Treasurer, welcomed the move as “the rate relief Australians need and deserve”, but added that it was not yet “mission accomplished”.
“It won’t solve every problem in our economy or in household budgets but it will help,” he said.
The cut on Tuesday began the process of reversing a run of 13 rate rises since May 2022. The RBA, which was more cautious in raising rates two years ago, has also been slower to begin reducing them, and the move came as other central banks have taken a more hawkish stance as inflation has persisted.
But economists had pencilled in the long-awaited cut after official data released last month showed headline inflation in Australia fell to 2.4 per cent in the December quarter from 2.8 per cent in the previous three months.
The upcoming election is expected to be contested over the cost of living and the Labor government’s economic management.
Gareth Aird, an economist with Commonwealth Bank, said it would have been a “harder sell” for the RBA to hold rates, with inflation trending lower and wage growth cooling.
He added that the timing ahead of the election had created an unusually “emotionally charged” environment around the rate decision.
The central bank had held rates at 4.35 per cent since November 2023 over concerns about inflation, which has remained above its target range of 2-3 per cent.
Michele Bullock, RBA governor, had warned that a further jump in the cost of goods and services would have been more damaging to the Australian economy than a tight monetary policy.
The RBA’s preferred “trimmed mean” measure of inflation, which excludes volatile factors such as petrol prices, dropped to 3.2 per cent year on year in the December quarter, from 3.6 per cent in the previous quarter.
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