RBA Reduces Rates for First Time in Four Years, Cautions on Inflation

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On Tuesday, Australia's central bank, the Reserve Bank of Australia (RBA), reduced interest rates for the first time in over four years, lowering the cash rate by 0.25% to 4.1%. While this rate cut offers relief to borrowers, the RBA remains cautious, warning that it’s premature to declare victory over inflation and stressing the need for more data before considering further reductions.

The rate cut is seen as a positive development for Prime Minister Anthony Albanese, who is preparing for a potential election. The RBA’s decision follows a surprise drop in core inflation to 3.2% in Q4, and markets had largely expected a quarter-point cut. However, there's a low probability of additional rate cuts in April, though the market has nearly priced in a move in May.

Governor Michele Bullock expressed caution, saying that while inflation progress is welcome, the risks of further inflation remain due to a robust labor market. She emphasized that the central bank’s policy stance is still restrictive, despite the rate cut. Bullock also rejected market expectations of multiple rate cuts this year, calling them “unrealistic,” and noted the need for more data before making any further decisions.

Despite the RBA lagging behind other central banks in the global easing cycle, the rate cut provides relief, particularly in the housing market, where prices have dropped from their peaks. However, affordability remains a challenge for the government. The move also supports consumer spending, which has increased due to tax cuts.

Economists expect the RBA to continue with a slow rate-cutting cycle, with only a few more cuts anticipated. Concerns about inflationary pressures from a strong labor market and potential upward pressures on inflation in the medium term suggest that the easing cycle will be cautious and gradual.

Paraphrasing text from "Reuters" all rights reserved by the original author