By Stella Qiu and Wayne Cole
SYDNEY (Reuters) -Australia’s central bank cut rates for the first time in more than four years on Tuesday but warned it was too early to declare victory over inflation and was cautious about the prospects of further easing.
The rate cut will provide some relief to borrowers and comes as good news for Prime Minister Anthony Albanese, who is facing a tough election to be held no later than May 17. Speculation is growing that he may use the opportunity to call an early election.
Wrapping up its February policy meeting, the Reserve Bank of Australia (RBA) cut the cash rate by a quarter-point to 4.1%, the first reduction since November 2020 when the pandemic crisis saw rates slashed to an all-time low of 0.1%.
Markets had wagered heavily on a quarter-point cut after core inflation surprised to the downside in the fourth quarter at 3.2%. Swaps imply just an 18% probability for a follow-up cut in April, although a move in May is still almost fully priced in.
“While today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing,” the board said in a statement, noting that upside risks to inflation remain due to a strong labour market.
“The Board’s assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate.”
The Australian dollar was off 0.1% at $0.6352, while three-year bond futures fell 5 ticks to 96.08 as Governor Michele Bullock pushed back on market pricing of two more rate cuts this year in her press conference.
“I want to be very clear that today’s decision does not imply that future rate cuts along the lines suggested by the market are coming,” said Bullock, who later described market pricing as “unrealistic”.
“The board needs more data that inflation is continuing to decline before making decisions about the future.”
Having already opened the door to a cut in December, the board warned that disinflation could stall if monetary policy was eased too much too soon.
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The RBA has lagged its peers in the global easing cycle and Australia’s cut comes as the Federal Reserve appears to be pausing its policy loosening.
Across the Tasman Sea, New Zealand is poised to go with another 50-basis point cut on Wednesday.
Inflation, which took off in Australia later than elsewhere, ran at 2.4% in the last quarter, back in the target band of 2-3%. The closely watched trimmed mean measure also slowed to 3.2%, from 3.6% previously, and is now expected to fall to 2.7% by June and stay there until mid-2027.
