The Reserve Bank of Australia (RBA) has lowered the cash rate by 25 basis points to 4.1%, marking the first rate cut in more than four years. The widely anticipated decision follows a sustained decline in inflation, providing some relief to mortgage holders after a prolonged period of high borrowing costs.
Inflation cooling, but risks remain
The RBA noted that inflation has “fallen substantially” since its 2022 peak, with underlying inflation dropping to 3.2% in the December quarter. This decline, combined with subdued private demand and easing wage pressures, suggests inflationary pressures are moderating more quickly than expected.
However, the central bank remains cautious. Some recent labour market data has been stronger than anticipated, indicating that conditions may be tighter than previously thought. Productivity growth has also remained weak, keeping unit labour costs elevated. The RBA warned that while inflation is trending downwards, risks remain on both sides. Cutting rates too aggressively could slow disinflation, while keeping them too high for too long could weigh on economic growth.
Mortgage holders to benefit
Major banks, including Westpac, NAB, Commonwealth Bank, and ANZ, have confirmed they will pass on the full 0.25 percentage point reduction to variable-rate mortgage holders. For a household with a $750,000 mortgage, this translates to an estimated $115 monthly reduction in repayments, or $1,380 per year, assuming the full rate cut is passed on. For a $1 million loan, the monthly saving could be around $154.
The cut follows months of speculation, with money markets pricing in an 85% chance of a reduction ahead of the announcement. Many lenders had already started lowering borrowing rates in anticipation.
Uncertainty over future cuts
Despite the reduction, the RBA signalled that further rate cuts are not guaranteed in the near term. The central bank stated that monetary policy “will remain restrictive” even after this reduction and emphasised its commitment to ensuring inflation returns to target.
The RBA’s outlook remains uncertain, with growth in household consumption and business investment still sluggish. While lower interest rates could provide a boost to spending, the extent of any economic rebound remains unclear. International risks, including geopolitical tensions and shifting monetary policies in the United States, add further complexity.
With the next RBA meeting scheduled for 31 March–1 April, markets will closely watch inflation data and labour market trends to gauge whether more rate cuts are likely in 2025.
