The Reserve Bank of Australia has cut the cash rate by a quarter point to 3.85%, easing pressure on mortgage holders grappling with high living costs and elevated interest repayments.
Economists view the RBA decision as a sign that Australia’s central bankers believe inflation is being tamed and that there is no longer a need for a borrowing rate over 4% to constrain households, especially as Donald Trump’s tariffs cast a shadow over the global economy.
The Reserve Bank governor, Michele Bullock, said inflation was coming down, and the jobs market was robust.
“So I think that’s so far, so good,” Bullock said.
“We have got just a little more comfortable that things are going in the right direction, so we can take our foot off the brake just a little bit.”
The cut, representing the second reduction this year, was partly designed to protect indebted households from Trump’s tariffs, which have spooked consumers and businesses, and created the potential for a protracted trade war.
Bullock said the global situation was “not just uncertain, but unpredictable”.
“It’s been a complete rollercoaster, I have to say,” she said.
Australia’s economic outlook has generally soured in the past few months, putting downward pressure on interest rates.
Employment growth was expected to ease more than previously forecast, while wages growth in the private sector will stabilise at a lower rate than previously forecast, according to the RBA.
The subdued domestic outlook and global trade challenges sparked a discussion among the rate-setting board members over whether they should cut the cash rate by a bumper half-percentage point.
“We did debate it and you’d expect us to debate it, quite frankly, but it wasn’t the strongest argument in the room,” Bullock told media.
Bullock said while she didn’t expect Australia to fall into recession, the RBA was alert to the possibility if economic conditions deteriorate.
While the quarter point reduction from 4.1% was widely anticipated, some market watchers had anticipated a half point cut and a few expected no rate cut.
Financial markets have upped their bets on another quarter percentage point cut at the next RBA rate meeting in July.
The decision to cut was supported by recent consumer price data, showing a key measure of inflation had dropped below 3% for the first time in three years. A strong jobs market and easing global tensions undermined calls for deeper RBA cuts.
Economists view the rate cut as a shift back towards a neutral rate setting that neither ignites nor constrains the economy after a prolonged period of elevated borrowing costs.
Mortgaged households would save an additional $114 a month for a $750,000 loan, according to Canstar, after the cash rate reduction flowed through to lending products.
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All of the major banks promptly declared after the rate announcement that they would decrease their standard variable home loan rate by 25 basis points in the coming weeks.
The drop in borrowing rates was expected to drive homebuyer activity but Bullock said the onus was on federal and state governments to resolve housing shortages.
“I acknowledge that some people are worried that as interest rates come down, housing prices will rise, but other policies have really got to step up here,” she said.
Jim Chalmers said on Tuesday the cut was “welcome relief for millions of Australians”.
“We are really pleased to see more help is on the way. And that’s what this decision today is all about,” the treasurer said.
He said the RBA had noted there was “a lot of unpredictability and uncertainty in the global economy” which is “casting a dark shadow”.
The Trump effect
The RBA focused its attention in its monetary policy on the deterioration in global trade caused by Trump’s tariff regime, marking a change from past statements that heavily focused on domestic matters.
It even modelled an escalating “trade war” scenario, in which an ensuing global confidence shock could send unemployment soaring in Australia. In that scenario, the RBA would need to cut rates heavily to stimulate the economy.
If a trade war escalated around the world, almost 300,000 Australians could lose their jobs, according to central bank forecasts.
Permanent global increases in tariffs would halve Australia’s growth over the next two years, leaving the economy about $80bn smaller, and unemployment at nearly 6%.
A protracted trade war would also force prices up if more businesses were forced to manage tariffs by lifting their prices, the RBA predicted.
“Multinational corporations whose margins are compressed in markets where tariffs have been raised might [put] upwards pressure on prices in other markets such as Australia,” analysts wrote.
If the trade battle eased faster than expected, however, a quick global recovery would mean the RBA “may be required” to keep the cash rate higher than markets now expect.
