The Reserve Bank has cut the cash rate to 4.1% with a quarter-point reduction, offering a reprieve to indebted households buffeted by years of high living costs and heavy mortgage repayments.
The decrease is the first since the early days of the Covid-19 pandemic, and has arrived just in time for the Labor government to campaign on its economic credentials before an election to be fought on cost-of-living policies.
Economists view the decision as a sign that Australia’s central bankers believe inflation is being tamed.
Lenders had been dropping their borrowing rates in anticipation of a cut, and should now flow through in full to mortgages.
A household with a $750,000 loan will see their monthly repayments fall by $115 if their mortgage rate falls by 25 basis points, in line with the cash rate decision.
The RBA painted a picture in its monetary policy statement accompanying the rate decision of an economy giving out mixed signals, raising questions about whether the economy needed stimulating through lower borrowing rates.
On the one hand, the jobs market is tight, and there are no immediate signs that there will be a sharp increase in unemployment, according to the statement. At the same time, mortgaged households are under sustained pressure, and watching their spending closely.
Against that backdrop, the central bank opted to cut the cash rate to bring the level back towards the “neutral rate”, which the RBA concedes is a difficult number to identify.
It acknowledged that mortgaged households have endured a prolonged period of high borrowing costs.
“The rise in household interest payments since 2022 has put pressure on household budgets, which has contributed to weak consumption growth over the past few years and an increase in housing loan arrears to around their pre-pandemic levels,” the RBA said.
The RBA last cut rates in November 2020 as a stimulus measure designed to combat the fallout from the pandemic. A subsequent period of inflation led to 13 rate hikes.
Several of Australia’s big lenders, including the Commonwealth Bank, Westpac and National Australia Bank, immediately announced they would pass on the full 25 basis point cut to their variable loan customers.
The central bank’s forecasts have core inflation, its preferred measure that removes volatile prices and government-subsidised measures, falling faster than previously expected, and expected to stabilise at about 2.75% from late this year.
It acknowledges, however, that there was a “high degree of uncertainty” about the policies of the Trump administration and how they would affect the global economy.
The US’s new tariff regime is widely viewed as inflationary, given consumers will pay for increases in the cost of global goods, upsetting the anticipated rate-cutting cycle.
Tony Sycamore, an IG Australia market analyst, said the RBA’s outlook sounded cautious.
“The forecasts published today suggest that if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range,” Sycamore said.
“In removing a little of the policy restrictiveness in its decision today, the board acknowledges that progress has been made but is cautious about the outlook.”
Central bank watchers have warned that people should not expect an avalanche of cuts because of lingering concerns about inflation and the fallout from US tariffs.
