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After a 13-month wait, the Reserve Bank of Australia finally pulled the trigger on interest rate cuts last Tuesday – and it might be the best we get in 2025, at least according to governor Michele Bullock’s hawkish follow-up speech.
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Any additional cut (only the second in four years, mind you) would bring things under 4% again for the first time since mid-2023 when the RBA hiked six times.
Discussions near-instantly turned in that direction, with borrowers eager to see even more pressure drained out by more hard chops.
Judging by messaging after this February trim though, they may be too eager.
While the central bank kowtowed to global moves and lowered rates by 0.25 basis points, the RBA then immediately flashed the alarm for Australian borrowers: Don’t count on much more rate relief through this year.
“The market is expecting quite a few more interest rate cuts in the middle of [the] next year, about three more on top of this,” Ms Bullock said on Tuesday. “Whether or not that eventuates is going to depend very much on our data.”
Then the kicker – “Our feeling at the moment is that that is far too confident.”
The wider RBA board had a similar feeling, warning “upside risk remains” and that everyone may be getting a bit over-excited this week.
“While today’s policy decision recognises the welcome progress on inflation,” the central bank’s brains trust decision-makers said in its carefully worded Tuesday release, “the board remains cautious on prospects for further easing.”
The feeling seems to be quite simple: High interest rates are working to bring down demand for goods and services and the economy is (slowly) catching up.
And so, things start to feel very cautious again, even in a week that heralded a cut.
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Interestingly, markets already seem to be looking to the RBA’s July meeting. This would see the Reserve Bank skip making any cuts in April and May.
On the central bank’s side, the RBA will now closely watch how Australia takes this week’s chop; it believes restrictive rates are still very necessary to pull a bit more demand out of the wider economy and really wrangle consumer prices in a meaningful way.
“The forecasts suggest that if monetary policy is eased too much too soon disinflation could stall and inflation would settle above the midpoint in the target range,” the board explained to partially defend its still quite hawkish stance.
“In removing a little of the policy restrictiveness in its decision, the board acknowledges progress has been made, but is cautious about the outlook.”
Today, the cash rate sits at 4.1%. It may now stay that way for some time.
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