Australia’s RBA Cuts Interest Rates To 4.10%, Inflation Softening
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The Reserve Bank of Australia (RBA) made a significant monetary policy shift on Tuesday, February 18, 2025, by reducing its cash rate target by 25 basis points to 4.10%.
This marks the first interest rate cut since November 2020, when the central bank responded to pandemic-induced economic challenges2.
The decision to ease monetary policy was primarily driven by encouraging inflation data.
The RBA noted that underlying inflation had moderated more quickly than anticipated, with the December quarter recording a 3.2% year-on-year increase.
This trend, coupled with subdued growth in private demand and easing wage pressures, has bolstered the central bank’s confidence that inflation is moving sustainably towards the midpoint of its 2-3% target range.
Despite this positive development, the RBA maintained a cautious stance regarding future policy easing.
The board highlighted potential upside risks, including unexpectedly strong recent labour market data suggesting tighter conditions than previously thought.
The central bank’s revised forecast for underlying inflation over 2026 has been slightly increased, based on the cash rate path implied by financial markets.
The labour market remains a key focus for the RBA.
While the unemployment rate declined to 4% in late 2024, KPMG forecasts suggest it may rise modestly to 4.2% by the end of 2025.
This projection is supported by historically high levels of job vacancies, which could help ease nominal wage growth and further moderate inflationary pressures.
Looking ahead, the RBA expects year-ended headline inflation to increase above 3% in the second half of 2025 before returning to slightly above the midpoint of the target range later in the forecast period.
This volatility is attributed to the scheduled unwinding of cost-of-living measures, such as electricity rebates.
The market reaction to the rate cut was mixed.
While the Australian dollar strengthened, the ASX 200 experienced a slight decline of 0.54%.
This response suggests that investors are carefully weighing the implications of the RBA’s decision and its cautious outlook for future policy moves.
