After keeping interest rates on hold since November 2023, the Reserve Bank (RBA) finally joined its global counterparts and made its first rate cut since 2020, leaving the Bank of Japan (BoJ) and Norges Bank as the only G10 central banks yet to cut rates in the current downcycle.
With trimmed mean inflation heading towards the RBA’s target range, today’s announced 0.25% cut, which takes the official cash rate to 4.10% came as no surprise to the market.
Given that the consensus from leading economists and money markets was for a 93% chance of a rate cut, the market would have been in relative shock had a cut not been announced today.
Minutes after the RBA's decision to cut the cash rate today, three of the big-four banks, Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and Commonwealth Bank (ASX:CBA) announced they would cut variable rates by full amount (0.25%).
The initial statement by the RBA highlights three key conclusions that the board shared with the market today, namely:
- Inflation has fallen considerably since 2022.
- Inflation pressure were easing faster than expected.
- The board is more confident of inflation moving the mid-point of its target range.
Explaining today’s policy decision, RBA Governor Michele Bullock made the following comments.
“The board remains vigilant to the upside risk to inflation and has noted that monetary policy will need to remain sufficiently restrictive until it’s confident that inflation is moving sustainably towards the target range.”
“Through 2022/2023 most component of the CPI basket were growing faster than usual, inflation in housing and goods prices was particularly higher over that period. But over the past 18 months, goods prices inflation has declined substantially as supply disruptions associated with Covid-19 and the war in Ukraine have subsided and the global demand for goods has eased.”
“Inflation from retail goods, consumer and groceries is now close to its historical average.”
“Key drivers of elevated inflation are housing costs and market services inflation; they remain above their average levels and have been easing only gradually.”
“The key takeaway areas here is that domestic capacity pressures in both the housing and market services areas are contributing to above target inflation.”
Economists were quick to describe today's cut by the RBA as a hawkish cut, especially given the RBA's note of caution that accompanied today's decision.
With the RBA not wanting to create a secondary round of inflation, Diana Mousina deputy chief economist at AMP suspects any future rate cuts this year will be highly data driven.
Treasurer Jim Chalmers described today's cut as welcome relief for millions of Australians which demonstrates the progress they have made together to combat inflation.
RBA Governor Michele Bullock is expected to provide greater clarity on today's rate cut at a press conference at 3.30 (AEST) today.
Banks/lenders pre-empt the RBA
Meanwhile, a number of banks decided to pre-empt today’s rate cut by already dropping their term deposits.
Based on Canstar data, no fewer than 20 banks have cut at least one term deposit, including the big four banks. Canstar reports National Australia Bank (ASX: NAB) and Australia & NZ Bank (ASX: ANZ) have cut up to 0.2% on one of their savings products.
However, today's rate cut is cause to celebrate.
AMP has become the latest bank to move on interest rates, with one, two, three and five-year fixed terms for both principle and interest and interest-only loans for owner-occupiers and investors having already fallen by 0.25%.
AMP’s new one-year rate starts at 5.89%, while its three-year fixed rate is 5.70%.
For [property] investors, the new rate starts at 6% for one year, while three-year loans come in at 5.73%.
Implications for A$ and Australian equities
Chris Weston, Head of Research at Pepperstone questions if the RBA’s fresh easing cycle will set off a fresh wave of A$ selling. Given the sharp depreciation seen through Q424 and into January, he’s also flagging the heightened risk of imported inflation in the quarters ahead.
“All things being equal if we take the cut in isolation - given a 25bp cut is so well discounted - the A$ shouldn’t move to any great degree,” says Weston.
“However, what could move the AUD and interest rate-sensitive equities, is the RBA’s guidance and the appetite for ongoing cuts.”
Once the dust has settled and the market has fully digested Governor Bullock’s post-meeting press conference, it won’t take long, adds Weston, for the market to revert to trading the A$ as a China proxy, or as an expression of positive/negative sentiment in the equity markets.
While the market is pricing 2 to 3 additional cuts this year, including another 25bp cut in May, what’s less clear, especially in light of Trump tariffs, adds Weston is the total number of rate cuts between now and December.
Cuts could be shallow
Weston also reminds the market there’s a high probability future RBA statements will lack the commitment to meet that implied level of cuts through the year.
While the pace of disinflation seen in the Q424 CPI print may have contributed to the RBA’s confidence to cut, Weston expects the RBA to remind Australians that the job of bringing inflation to target is not yet complete.
“Looking ahead, we note that the Q125 CPI release is due on 30 April and the Q225 CPI print is due on 30 July. The outcomes of both releases will go some way to dictating the extent of rate cuts seen through 2025,” notes Weston.
On an encouraging note, Westpac’s economists expect headline inflation to fall to 1.75% by June 2025, with the trimmed mean inflation measure forecast to moderate to 2.4%.
Given that the RBA’s prior forecasts of 2.5% and 3% respectively are considerably higher than Westpac’s, all eyes should be on whether the central bank alters its inflation forecasts by a similar quantum.
Meanwhile, the bond market expects the RBA to lower the cash rate to just 3.45% by the end of the year, and investors forecast the cash rate to settle at 3.3%.
Based on Canstar numbers, monthly repayments for a household with a $1 million mortgage would be cut by $541 if the RBA cuts the cash rate to 3.45% by the end of the year.
Similarly, repayments on $750,000 and $500,000 mortgages would shrink by $406 and $270 respectively by year’s end on the same rates projection.
Governor Bullock said: "We haven’t had a sustained period of high inflation in Australia for more than 30 years. It’s not familiar to people. But it’s one of the key reasons why people are doing it tough and finding it harder to make ends meet.
"The RBA’s job, our mandate is to keep inflation between 2 and 3%, and to aim at the midpoint, 2.5%. And we use the cash rate which influences interest rates that households and businesses face, to achieve this by curbing the growth of demand across the economy.
"That’s because inflation is the result of demand for goods and services being higher than the ability of the economy to supply those goods and services. And we want to bring inflation down in a way that doesn’t cause a spike in unemployment.
“That’s the balancing act we are trying to get right, and it is a challenge.”
Related content
