Australia’s central bank lowered its benchmark cash rate by 0.25 percentage points on Tuesday to 3.60%, the lowest level in two years, citing slowing inflation and a softer labour market. However, it signalled caution over the likelihood of additional rate cuts.
Concluding a two-day policy meeting, the Reserve Bank of Australia (RBA) stated that recent data and revised projections indicated core inflation would likely ease to about the midpoint of its 2%–3% target range, assuming a gradual relaxation of monetary policy.
Markets had fully anticipated the rate cut, especially after being caught off guard in July when the central bank kept rates unchanged. This expectation was driven by the fact that inflation eased as intended in the second quarter, while unemployment edged higher.
“With underlying inflation continuing to decline back towards the midpoint of the 2–3% range and labour market conditions easing slightly, as expected, the Board judged that a further easing of monetary policy was appropriate,” according to a statement by the board.
“The Board nevertheless remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and potential supply.”
The RBA noted that the rate cut was unanimously backed by policymakers, following an unusual split decision in July.
The Australian Dollar held steady at $0.6508, while three-year bond futures recovered earlier losses to finish flat at 96.60, Reuters reports. Interest rate swaps reflected only a 34% chance of another cut in September, though markets have fully priced in a move for November.
Just last month, the RBA surprised markets by keeping rates unchanged at 3.85% in a rare split decision, as most policymakers preferred to wait for more evidence that inflation was moving toward the midpoint of the 2–3% target range.
Furthermore, headline inflation slowed to 2.1% in the June quarter, while the trimmed mean measure of core inflation fell to a three-year low of 2.7%. Meanwhile, the labour market has softened from full employment, with the jobless rate rising to 4.3% from 4.1% in a single month.
There are indications that the February and May rate cuts are beginning to take effect, as consumer spending shows signs of improvement, supported by easing inflation and earlier tax reductions.
“Unemployment has jumped, strengthening the case for cuts. At the same time, robust household spending shows some families can still find room for discretionary purchases,” stated Harry Murphy Cruise, head of economic research and global trade at Oxford Economics Australia.
“In the end, prices and jobs trump everything else. With good news on inflation and bad news on unemployment, more easing is warranted.”
Oxford Economics forecasts one additional rate cut this year, likely in November.