The Reserve Bank of Australia (RBA) remains more cautious than the market regarding the likelihood of further interest rate cuts, despite expectations for additional easing.
RBA Assistant Governor Sarah Hunter reaffirmed this stance on Tuesday during a speech at the Australian Financial Review Banking Summit, following the central bank’s first rate cut in over four years at its February meeting.
The RBA reduced the cash rate by 25 basis points to 4.1%, citing the need to align with global monetary policy trends.
Market expectations currently suggest a 65% probability of another rate cut in May, according to CommSec.
Hunter, who heads the RBA’s economics unit, reiterated that policymakers believe the market is overly optimistic about the pace and extent of future easing.
"As the Governor and Deputy Governor have both indicated recently, the February decision reflected a judgement by the board that it was the right time to take some restrictiveness away, but the board were more cautious than the market about prospects for further easing," Hunter said.
Recent minutes from the RBA’s board meetings support this cautious stance, with officials noting that the February rate cut did not commit them to further reductions. “Members agreed that their decision at this meeting did not commit them to further reductions in the cash rate target at subsequent meetings,” the minutes stated.
Hunter highlighted significant uncertainty surrounding the RBA’s central economic forecasts, particularly in relation to U.S. policymaking.
"Board decisions are always made in an uncertain environment, which means thinking about the distribution of risks around the central forecast.
"One of the things we are focused on right now is U.S. policy settings, the impact of these on the global economy and how this flows through to activity and inflation here in Australia; we have been using scenarios, analysis and judgement to assess the policy implications," she explained.
Despite concerns over global risks, Hunter pointed to signs of economic resilience within Australia, noting that the increase in household consumption during the December quarter was not merely a seasonal fluctuation:
"Digging further into the data suggested there was more to it than that. Not surprisingly, spending on the types of goods that tend to have significant sales, such as household goods and clothing, did grow strongly in the quarter.
"However, we had also seen a modest lift in household disposable income from the middle of 2024, and discretionary spending not impacted by sales (e.g. eating out) also showed signs of picking up, which suggested a genuine improvement in underlying momentum," she said.
Meanwhile, the U.S. Federal Reserve is set to deliver its interest rate decision and economic projections later this week, which are expected to provide crucial insights into how U.S. central bankers perceive the economic impact of the Trump administration’s policies.
