In a move that has brought a smile to the faces of personal and business borrower alike (and a few under-the-pump politicians!), the Reserve Bank of Australia (RBA) reduced its benchmark interest rate by 25 basis points to 4.10% at its 17-18 February 2025 Board meeting. The last time this benchmark rate was reduced was way back in November 2020, when it was trimmed to just 0.1%.

However, the accompanying rates decision commentary suggested that an encore performance at the next RBA meeting on 1 April 2025, with it containing the following insightful phrase: “the Board remains cautious on prospects for further policy easing”.

Source: RBA and TCN

Why did the RBA Board finally acquiesce to intense pressure to ease its monetary policy settings at today’s Board meeting?

Quite simply because it believes that inflation is, at long last, finally coming under control, albeit with some caveats.

The rates decision commentary noted that Australia’s main Inflation indicator, the Consumer Price Index (CPI) has fallen substantially since its peak in 2022, as higher interest rates worked to bring aggregate demand and supply “closer towards balance”. The RBA observed that growth in private demand had remained subdued and wage pressures have eased. And looking ahead a bit, the Bank was unsure whether the healthy recovery in household spending in late 2024 would be maintained over coming months. Finally, in another inflation-specific sound-bite, the commentary added that the recently released December 2024 quarter underlying inflation yardsticks suggested that inflationary pressures were “easing a little more quickly than expected”.

In the face of this domestic economic scenario, the Bank had become increasingly confident that inflation was now moving sustainably towards the midpoint of the desired 2–3% target range.

However, the RBA Board’s decision to cut rates at its February 2025 was not a proverbial ‘lay down misère’. The accompanying rates decision commentary highlighted the multiple lingering risks to the inflation outlook. These included the unexpected strength shown in some recent labour market data releases. The Bank neatly side-stepped any overt comments on likely future growth in labour costs, but if wage pressures build in a still tight labour market, they could engender inflationary consequences that will quickly meet the RBA’s line of sight.

With regard to the global outlook, the RBA simply stated that offshore economic conditions remained uncertain – no need to polish the crystal ball to see that one, with a multitude of geopolitical events presenting! The RBA commentary noted that market expectations for further central bank easings in key major overseas countries have moderated somewhat in recent months, particularly in the United States (threats by the Trump Administration to implement material tariffs, which will inevitably lead to retaliatory tariffs by other countries, will do that!)

Reading between the lines in the rates decision commentary for today’s RBA Board meeting, the signs are there that another rate cut ahead of the next Federal election, due by May 2025, is highly unlikely. It specifically noted that “if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range”. Then there was that earlier comment that “the Board remains cautious on prospects for further policy easing”.

It appears that borrowers and sitting politicians alike will have to be thankful for small mercies!