(Bloomberg) -- Australia’s central bank cut interest rates for the first time in four years as price pressures cool while stressing it won’t ease as aggressively as markets anticipate.
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The Reserve Bank lowered its cash rate by a quarter-percentage point to 4.1% in a widely expected decision while warning in its statement Tuesday that reducing borrowing costs too quickly could result in dinsinflation stalling. It also flagged significant geopolitical and policy uncertainties globally.
Governor Michele Bullock, at the briefing that followed, reiterated that policymakers will be data-driven and cautioned the market against pricing in rate cuts in succession. Stocks extended their drop and closed 0.7% lower while yields on three-year government bonds rose further after her remarks.
“I want to be very clear that today’s decision does not imply that further rate cuts along the lines suggested by the markets are coming,” Bullock said in Sydney.
“The board needs more data and evidence that inflation is continuing to decline before making decisions about the future path of interest rates,” she said. “The board is very alert to upside risks that could derail the deflationary progress.”
The yield on policy sensitive three-year notes climbed six basis points during Bullock’s press conference as traders pared expectations of further rate cuts by the RBA. Now, they are fully pricing just one rate cut and less than 80% chance of a second this year, down from expectations of at least two more prior to the decision, according to swaps data compiled by Bloomberg News.
The decision may provide a shot in the arm for Prime Minister Anthony Albanese as he seeks a second term in office in an election due by May 17. His ruling Labor party is trailing the opposition Liberal-National coalition in opinion polls and cost-of-living and housing have been among the top concerns for the electorate.
Treasurer Jim Chalmers said in a press conference in Canberra that the rate cut was “the soft landing that we have been planning for” and offers a “relief that Australians need and deserve.” Like the RBA, the treasurer didn’t declare victory in the fight against inflation, sharing the central bank’s concerns about the uncertain economic outlook going forward.
The Australian dollar fluctuated close to a two-month high and rallied the most since December against New Zealand’s currency on Tuesday.
“It looks like a fairly cautious rate cut from the RBA,” said Felix Ryan, an analyst at ANZ Group Holdings Ltd. “Short term, we think this can support the Aussie as markets price in a shallower easing cycle for the RBA.”
“The RBA rarely delivers a solitary rate cut or hike. They usually arrive in groups,” said Callam Pickering, an economist at global jobs site Indeed Inc. “We believe that a second rate cut is likely to be delivered in May or July. However, the RBA will be cautious.”
Australia’s policymakers didn’t sound like “like a Bank that is primed to deliver back-to-back cuts,” according to Richard Franulovich, head of FX strategy at Westpac Banking Corp. “If anything, they’re sitting back and awaiting more conviction.”
The RBA’s decision comes as President Donald Trump’s program — ranging from tariffs to tax cuts and immigration curbs — has added uncertainty to an already clouded global outlook, and economists say it has the potential to stoke US inflation. Federal Reserve Chair Jerome Powell has said the latest inflation data shows the central bank still has more work to do.
Economists in a Bloomberg survey expect two more rate reductions this year — similar to market pricing for the cash rate to end 2025 at 3.6%. That suggests the easing cycle will be fairly shallow given Australia’s rates don’t have as far to go to neutral.
In its quarterly update of economic forecasts, the RBA cut its estimate for core inflation in June 2025 to 2.7% from 3%. It anticipates the trimmed mean gauge will stay at 2.7% through to June 2027, meaning it will fail to reach the midpoint of the target.
There are tentative signs Australia’s economy picked up in the final three months of 2024 and that this momentum has been sustained in the new year, led by consumer spending. The labor market also remains a bright spot.
In its updated forecasts, the RBA lowered its peak for the jobless rate to 4.2% from 4.5%. Economists predict data on Thursday will show unemployment edged up to 4.1% in January from 4%.
While low unemployment supports demand, economists say a monetary-fiscal split is complicating the RBA’s efforts to tame inflation. Government spending at both state and federal levels remains strong and is expected to rise further in an election year.
--With assistance from Matthew Burgess, Ben Westcott and Toby Alder.
(Updates with comments from governor during the briefing.)
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