In a significant move, the Reserve Bank has reduced interest rates for the first time in over three years, marking its first cut since November 2020.
Inflation Moderating
Inflation has declined significantly since its peak in 2022, reflecting the impact of higher interest rates in rebalancing aggregate demand and supply. Underlying inflation in the December quarter was 3.2%, indicating that inflationary pressures are easing slightly faster than anticipated. Subdued growth in private demand and easing wage pressures have further bolstered confidence that inflation is moving sustainably toward the midpoint of the 2–3% target range.
Upside Risks Remain
Despite progress, upside risks persist. Recent labour market data has been stronger than expected, suggesting the labour market may be tighter than previously thought. The central forecast for underlying inflation, based on the cash rate path implied by financial markets, has been revised slightly upward over 2026. While today’s decision reflects welcome progress on inflation, the Board remains cautious about further policy easing.
Uncertain Economic Outlook
Economic growth remains weak, with private domestic demand recovering more slowly than expected. Uncertainty surrounds the sustainability of the late 2024 recovery in household spending. Wage pressures have eased more than anticipated, housing cost inflation is declining, and businesses in some sectors continue to face challenges in passing on cost increases.
Labour market conditions remain tight, with some indicators suggesting further tightening in late 2024. Labour underutilisation has declined, and businesses report ongoing labour shortages. Productivity growth has not improved, keeping unit labour costs high.
Domestic and Global Uncertainties
The outlook for domestic activity and inflation is uncertain. While household consumption is expected to rise with income growth, there is a risk that consumption growth may be slower than anticipated, leading to subdued output growth and a sharper deterioration in the labour market. Conversely, labour market outcomes could prove stronger than expected, given leading indicators.
Globally, geopolitical and policy uncertainties remain significant, potentially dampening activity if households and firms delay expenditures. While most central banks have begun easing policy as inflation moves toward target, market expectations for further easing have moderated, particularly in the United States.
Priority: Returning Inflation to Target
Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority, consistent with the RBA’s mandate for price stability and full employment. Longer-term inflation expectations remain aligned with the target, and it is critical this continues.
The Board acknowledges that monetary policy remains restrictive, even after today’s rate reduction. While some upside risks to inflation have eased and disinflation may be progressing faster than expected, risks remain on both sides.
Today’s forecasts suggest that easing policy too quickly could stall disinflation, leaving inflation above the target midpoint. By modestly reducing policy restrictiveness, the Board recognises the progress made but remains cautious about the outlook.
Future Policy Direction
The Board will continue to rely on data and evolving risk assessments to guide decisions. It will closely monitor global economic and financial market developments, domestic demand trends, and the inflation and labour market outlooks. The Board remains resolute in its commitment to returning inflation to target and will take necessary actions to achieve this outcome.