Reserve Bank of Australia Cuts Interest Rates for First Time in 4 Years

People cross a road near Pitt Street Mall in Sydney CBD, Australia on Dec. 24, 2024. Roni Bintang/Getty Images

The Reserve Bank of Australia (RBA) has delivered a long-awaited New Year decision, cutting the cash rate target from 4.35 to 4.10 percent—the first reduction since November 2020.

Along with the rate cut, the interest rate paid on Exchange Settlement balances will drop to 4 percent, signalling a shift in the bank’s approach to tackling inflation.

The RBA’s decision comes after a notable decrease in inflation from its peak in 2022.

According to the bank, inflation had dropped to 3.2 percent in the December quarter, indicating that inflationary pressures were easing more quickly than initially anticipated.

The RBA Board, in its statement, said that with private demand growth subdued and wage pressures easing, it is more confident that inflation is gradually moving towards its target range of 2–3 percent.

“The data shows that inflation is progressing towards the target faster than expected. However, caution is warranted,” the Board said, following its meeting.

Treasurer Jim Chalmers was quick to respond to the cut, calling it “the rate relief Australians need and deserve. ”

He added it will not solve every problem in the economy or household budgets but it will help.

“Today’s result is a demonstration of the substantial and sustained progress we’ve made on inflation together. When we came to office, interest rates were going up, now they are going down,” he said.

He noted inflation is now almost a third of 6.1 percent—where it was when Labor entered government.

Upside Risks and Labour Market Strength

Despite the positive signs, the RBA remains wary of upside risks.

Recent labour market data revealed unexpected strength. While wage pressures have somewhat relaxed, indicators suggest that labour market conditions remain tighter than expected, with the risk of a sharper deterioration in employment outcomes if economic recovery falters.

As a result, the central forecast for underlying inflation has been revised slightly upwards for 2026, indicating that the path to inflation control may not be as straightforward as initially believed.

“There is a risk that any improvement in consumption could be slower than anticipated,” the RBA cautioned.

While some sectors have seen a drop in housing cost inflation and businesses have reported challenges in passing on cost increases to final prices, broader concerns about economic growth persist.

The recovery in private domestic demand is slower than expected, and the RBA remains uncertain about the sustainability of the late 2024 rebound in household spending.

Global Uncertainty

The RBA also pointed to significant external uncertainties, with geopolitical and policy factors continuing to weigh heavily on the global economic outlook.

As central banks worldwide become more confident in returning inflation to target, market expectations for further easing have moderated, particularly in the United States.

The RBA says, it will remain cautious, focusing on how these global factors impact domestic demand and inflation.

RBA’s Focus on Inflation Target and Cautious Approach

The Bank’s primary focus is still on returning inflation sustainably to its target range within a reasonable timeframe.

The Board reiterated its commitment to price stability and full employment, aligned with its mandate. Longer-term inflation expectations have remained consistent with the RBA’s target, and the bank aims to keep it that way.

“We must be careful not to ease too quickly, as doing so could risk stalling disinflation and lead inflation to settle above the target,” the RBA warned, reinforcing the message that it will continue to rely on evolving data to guide its future decisions.

With inflation continuing to ease, the RBA has opted for a measured approach, removing some of its restrictiveness.

Big Four to Pass On Rate Cuts

All four major banks—CBA, ANZ, Westpac, and NAB—have announced home loan rate cuts following the Reserve Bank of Australia’s (RBA) decision to reduce the cash rate by 0.25 percent per annum (p.a.).

CBA will lower variable home loan rates by 0.25 percent per annum from Feb. 28, 2025. Group Executive Angus Sullivan said the move would provide much-needed relief to borrowers.

ANZ also confirmed a 0.25 percent per annum cut, with Group Executive Maile Carnegie calling it a welcome step for mortgage holders facing cost-of-living pressures.

NAB and Westpac moved swiftly, announcing their cuts minutes after the RBA’s decision.

NAB’s 0.25 percent reduction takes effect on Feb. 28, with Personal Bank Group Executive Ana Marinkovic saying the bank wanted to ease financial strain on households.

Westpac’s 0.25 percent cut for new and existing home loans starts on March 2, while deposit account rates will drop by the same margin from the end of February.