Australia: Central Bank kicks off loosening cycle in February
Bank delivers widely anticipated quarter-point cut: At its meeting on 17–18 February, the Reserve Bank of Australia (RBA) kicked off its monetary policy easing cycle, cutting the RBA cash rate by 25 basis points to 4.10%. The move had been priced in by our panelists, marked the first rate reduction since November 2020, and followed nine consecutive holds since late 2023.
Lower core inflation and subdued domestic demand drive decision: The RBA’s decision to cut was motivated by a faster-than-expected decline in underlying price pressures at the tail end of 2024. Moreover, the Bank noted that private demand remains sluggish and that wage pressures have eased, making it more confident that inflation will sustainably return to the midpoint of the 2.0–3.0% target band. Still, the RBA noted that upside risks to the inflation outlook remain. Moreover, the RBA hiked its 2026 core inflation forecasts, pointing to signs of a persistently strong labor market. These two factors likely dissuaded a larger cut, as did significant uncertainty regarding the economic outlook abroad—particularly relating to U.S. immigration and trade policy, and its impact on the Fed’s policy stance.
Further easing expected ahead despite a hawkish RBA: In its communiqué, the RBA struck a more hawkish tone than in previous meetings, stating that “the Board remains cautious on prospects for further policy easing”. In a subsequent statement, Governor Michele Bullock warned the market against penciling in rate cuts in succession and described current market pricing as “unrealistic”. Still, our Consensus is for inflation to remain within the Bank’s target band through Q4 2026 and for GDP growth to remain weak by pre-pandemic standards in 2025–2026. As a result, a majority of our panelists see room for another quarter-point cut in Q2, and then another 50 basis points of further reductions by the end of 2025. That said, higher-than-expected core inflation is an upside risk. The Bank will reconvene on 31 March–1 April.
Panelist insight: ING’s Deepali Bhargava commented:
“Our baseline expectation is that the US will increase duties on its global partners this year, with China remaining a main target. This clouds the Australian outlook, and we expect a reaction from the RBA in terms of monetary easing. While we acknowledge the risk of inflationary bumps slowing easing plans, we currently forecast a total of 100bp of RBA easing in 2025 (including this February cut), taking rates to a terminal level of 3.35%.”
Goldman Sachs analysts said:
“We caution against putting too much weight on the RBA’s forward guidance and concerns on the strength of the labour market. The latter has not stopped the Bank from pivoting dovish over the past few months and ultimately cutting rates today, consistent with large downward revisions to the staff forecasts for wages growth and inflation. […] Our base case is that the RBA cuts the policy rate again in April, May and November.”