RBA Rate Decision – Feb 2024

Date: 18/02/2025

*** GENERAL ADVICE ONLY***

RBA Release

The Reserve Bank of Australia (RBA) has taken a significant step by lowering its cash rate from 4.35% to 4.10%—its first cut since 2020. This decision marks an important pivot in monetary policy, aimed at supporting economic recovery while keeping inflation in check. Let’s explore in more detail why this cut was made, and what the future might hold.

Why Was the Rate Cut Made?

Cooling Inflation
Recent data shows that underlying inflation has been cooling, with the December quarter recording a drop to 3.2%. This decline is a strong signal that price pressures are easing, allowing the RBA to step in with a modest rate cut without fearing an immediate rebound in inflation.

A Cautious Approach in a Tight Labour Market
While inflation is moderating, the labour market remains tight. Wage pressures and a robust demand for workers can still contribute to rising prices. The RBA’s decision reflects a careful balancing act—providing relief to stimulate the economy while remaining mindful that overly aggressive easing could lead to renewed inflationary pressures.

Supporting Economic Growth
Lowering the cash rate makes borrowing cheaper. For households and businesses, this means easier access to credit, which can encourage spending and investment. This is particularly important in a global economy filled with uncertainties, where a slight boost in consumer and business confidence can help sustain the recovery.

Interpreting Mixed Economic Signals
The decision also comes amid mixed economic data. Although inflation is on a downward trend, some indicators—especially those related to the labour market—suggest that the economic recovery is still fragile. By cutting the rate modestly, the RBA appears to be taking a “wait and see” approach, allowing recent policy measures to work while keeping the door open for further adjustments if necessary.

How Does This Affect Households?

For many Australians, the impact of this rate cut is tangible. Consider an average homeowner with a $600,000 mortgage: the reduction in the cash rate could lower monthly repayments by about $92. Although banks are not obligated to immediately pass on the full rate cut, historical trends suggest that major banks tend to adjust their variable rates within 10 to 14 days. This easing in borrowing costs not only helps to alleviate the financial burden on households but also encourages spending—an important driver for economic growth.

What Lies Ahead: Will There Be More?

Monitoring Key Indicators
The RBA will continue to monitor crucial economic data such as inflation rates, employment figures, and consumer spending patterns. Any further rate adjustments will be driven by how these indicators evolve. If inflation continues to decline and economic growth remains subdued, additional cuts could be considered. However, should the labour market remain tight or global uncertainties intensify, the RBA may opt for a more cautious stance.

A Measured Path Forward
Given the current economic landscape, further easing is likely to be gradual. The RBA’s approach suggests that they are not ready to swing the policy pendulum too far in one direction. Instead, the emphasis appears to be on a calibrated response—providing support where needed without triggering unwanted side effects like a sudden spike in inflation.

Global Considerations
The global economic environment plays a role too. Many central banks around the world are navigating similar challenges, gradually easing their policies as they face their own economic uncertainties. This international context reinforces the likelihood that any additional rate cuts in Australia will be approached with similar caution and incremental adjustments.