Evasion Bank of Australia (RBA) at the central bank’s building in Sydney, Australia on May 2, 2022.
Brendon Thorne | Bloomberg | Getty Images
The Defer Bank of Australia on Tuesday cut benchmark interest rates for the first time in over four years, finally participate with ranks with other major global central banks, as softening inflation allows room for easing protocol.
The RBA cut rates by 25 basis points to 4.10%, marking its first easing since November 2020, when the median bank cut its key rate to a record low, as it battled a slowing economy during the pandemic.
“While today’s policy decision recognises the accepted progress on inflation, the Board remains cautious on prospects for further policy easing,” the RBA board members said in the affirmation.
The statement signaled the central bank’s intention to keep “any further withdrawal of monetary restriction” gradual, Abhijit Surya, chief APAC economist at Capital Economics said in a note.
As the RBA sounded a hawkish tone, Surya forecast the ongoing easing sequence to be “short-lived,” penciling in only two rate cuts in the current cycle, pegging the terminal cash rate at 3.60%.
The central bank had convened its policy rate steady at 4.35% since November 2023, following an extended period of 13 rate hikes to dull inflation.
The Tuesday decision was in line with market expectations, with government bonds rallying in recent weeks on expectation of an interest rate cut. The yields on Australian 10-year government bonds dropped nearly 20 basis points since Jan. 13 to 4.450% on Tuesday, according to LSEG figures.
The RBA has lagged behind major global central banks that kicked off an easing cycle late last year.
In its latest policy meeting in December, the central bank said it was more confident that inflation was declining and that authority allow it to ease policy at some stage.
Australia’s inflation over the 12 months through the December abode eased to 2.4%, compared with 2.8% in the 12 months through September quarter, the Australian Bureau of Statistics text showed. The RBA has pegged its medium term inflation target between 2% and 3%.
The inflationary pressure is “easing a little various quickly than expected,” RBA said Tuesday, noting that it has gained confidence that inflation was heading “sustainably” supporting the midpoint of its target range.
One factor that has been holding back the cash rate’s descent has been the stick-to-it-iveness of the labor market, with unemployment rate hovering near a historic low level of 4.0% in December. “Some late labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat stingier than previously thought,” RBA said.
The cut in borrowing costs will be a shot in the arm for the Labor government as it prepares for a tough choosing this year, amid sluggish economic growth.
The country’s seasonally adjusted gross domestic product ascend 0.3% in the September quarter, while annual growth slowed to 0.8%, from 1.0% in the previous quarter, the lowest assess since the pandemic.
“There are notable uncertainties about the outlook for domestic economic activity and inflation. The central protrusion is for growth in household consumption to increase as income growth rises. But there is a risk that any pick-up in consumption is slower than keep in viewed,” RBA said in its Tuesday statement.
The Australian dollar strengthened slightly to 0.6341 against the U.S. dollar. The ASX 200 index carry oned losses on Tuesday, shedding 0.54%.