RBA Reduces Cash Rate Amid Easing Inflation

The Reserve Bank of Australia (RBA) has lowered the cash rate target to 4.10%, with the interest rate on Exchange Settlement balances adjusted to 4%. This decision reflects significant progress in reducing inflation, which peaked in 2022. In the December quarter, underlying inflation was recorded at 3.2%, indicating that inflationary pressures are easing more rapidly than anticipated. Contributing factors include subdued growth in private demand and a moderation in wage pressures, bolstering the Board’s confidence that inflation is moving towards the midpoint of the 2–3% target range 

Cautious Approach to Future Policy Easing

Despite positive trends, the RBA remains cautious about further policy easing due to persistent upside risks. Recent labour market data have been unexpectedly robust, suggesting a tighter labour market than previously assessed. Consequently, the central forecast for underlying inflation has been slightly revised upwards for 2026. While acknowledging the progress made, the Board emphasises the need for careful consideration before implementing additional monetary policy easing.

Economic Outlook and Associated Uncertainties

The Australian economy continues to face uncertainties. Output growth has been weak, with private domestic demand recovering more slowly than expected. There is also uncertainty regarding the sustainability of the household spending recovery observed in late 2024. Although wage pressures have eased and housing cost inflation is declining, labour market indicators suggest conditions remain tight. Measures of labour underutilisation have decreased, and businesses report ongoing challenges in labour availability. Additionally, stagnant productivity growth implies that unit labour costs remain elevated.

The Board highlights notable uncertainties surrounding domestic economic activity and inflation. While household consumption is projected to grow with rising incomes, there is a risk that this increase may be slower than anticipated, potentially leading to prolonged subdued output growth and a sharper deterioration in the labour market. Conversely, labour market outcomes could surpass expectations, as indicated by leading indicators. Furthermore, uncertainties persist regarding the lagged effects of monetary policy and how firms’ pricing and wage decisions will adapt to slow economic growth and weak productivity amidst tight labour market conditions.

Global Factors Influencing Domestic Policy

Internationally, significant uncertainties remain, particularly concerning geopolitical events and policy directions. These factors may dampen global economic activity if households and businesses postpone spending due to unclear outlooks. While many central banks are easing monetary policy with increased confidence in achieving their inflation targets, market expectations for further easing have moderated in recent months. The RBA Board continues to closely monitor these developments to inform its policy decisions.