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The Reserve Bank has handed down its highly anticipated interest rate decision for February.
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RBA announces first interest rate decision for the year
18 February 2025
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7 minute read
At its meeting today, the Reserve Bank of Australia decided to cut the cash rate target by 25 basis points, reducing it to 4.10 per cent.
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The rate cut was largely expected, with 73 per cent of the economists and commentators on Comparison site Finder predicting it would be reduced.
AMP chief economist Dr Shane Oliver noted that underlying inflation has been falling faster than the RBA expected and has been running around target over the last six months.
“Economic activity is [also] a bit weaker than expected and Trump’s trade war poses more risks to Australian growth than inflation,” said Dr Oliver.
Wealth Within chief analyst Dale Gilham said while CPI has been falling for the past two years and now seems to be stabilising in the target range, risks still remain.
“The challenge is that prices for goods and services are not falling, they are just not rising as fast as they were,” said Gilham.
“Also, unemployment is still fairly low. That said, I think one or two rates cuts in 2025 is warranted in order ease the pain with regards to the cost of living.”
Economist Saul Eslake said although the labour market is still tight by historical standards, the slowdown in wages growth over the first three quarters of 2024 suggests that the unemployment rate consistent with sustainable full employment may be lower than the RBA’s estimate of about 4.5 per cent.
Given that monetary policy works with a lag, Eslake said that if the RBA had decided to delay easing monetary policy much longer, it would risk under-shotting the inflation target, as it did between 2016 and 2020. This would keep unemployment higher than necessary.
CreditorWatch, chief economist, Ivan Colhoun said that most economists were expecting the reduction in interest rates, with markets almost fully priced for the outcome.
“The board had signalled in December it was seeking increased confidence in staff forecasts that inflation would return to target in the second half of 2026,” said Colhoun.
“The low Q4 CPI outcome and favourable trends in a number of components provided that increased confidence, even though the unemployment rate remains lower than expected. Indeed, the prospect that inflation may achieve the target earlier than expected has increased.”
Colhourn said the cut slightly reduces the degree of monetary restriction imposed on both business and consumer borrowers.
“It’s likely the Governor will signal at her upcoming press conference that the war on inflation is not yet won, and as such a significant interest rate reduction cycle should not be expected at this time,” he said.
“That said, there will be keen focus on any clues as to what developments need to occur for a follow-up interest rate reduction and when that might be.”
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