RBA dashes hopes of further rate relief after first cut in four years

Millions of home buyers have been delivered financial relief after the nation’s major banks pledged to pass on the first cut in official interest rates in more than four years, but the Reserve Bank has dampened hopes for another rate cut in the middle of the looming federal election campaign.

The widely expected quarter percentage point cut, which Labor insiders had been hoping to use as a springboard into an election campaign that will be dominated by cost-of-living issues, took the official cash rate down to 4.1 per cent and will save about $100 a month for someone with a $600,000 mortgage.

But bank governor Michele Bullock said financial market expectations of a string of rate cuts over the next 15 months were “unrealistic”, effectively killing the idea of another cut at the end of next month and reducing the chances of a dash to the polls.

“Our feeling at the moment is that that is far too confident,” she said, noting the unexpected strength of the labour market was a key factor in the bank’s cautiousness.

“The board needs more data and evidence that inflation is continuing to decline before making decisions about the future path of interest rates.”

Prime Minister Anthony Albanese told ABC radio on Tuesday afternoon that the decision would not impact the timing of the election, which is due by May 17.

“This won’t have an impact on the timing of the election. We’ve been working hard, and we’ve been preparing, we’ve prepared a mid-year economic forecast in December, we’ve been working on the budget, and the ERC - expenditure review committee - met for many, many hours yesterday and again this morning,” he said.

A relieved Treasurer Jim Chalmers said the rate cut was “very welcome” for millions of people, but he played down suggestions a single rate cut would be a salve for hard-pressed families.

“Now, we know that it won’t fix every challenge we have in our economy and household budgets, but it will help,” he said.

The RBA’s move forced the opposition to change its political messaging, with shadow treasurer Angus Taylor arguing the cut was all due to Australians and not the government.

“We’ve seen households doing the work,” Taylor said. “This point was made in a statement from the RBA today that we have seen very strong public demand but very weak private demand. To translate that into commonsense language, what that means is that it is households that have been tightening their belts. Government hasn’t tightened its belt and the result is Australians are paid a high price for that.”

The cut itself prompted an “active debate” within the RBA board, Bullock said, because while there were broad signs of easing inflation, the nation’s jobs market remained very strong.

“The board had an active debate on the arguments on both sides on this, but in the end, came to the view the better decision was to ease a little bit of the restrictiveness, still maintain some restrictiveness, but ease a little bit of restrictiveness in recognition we’re making progress towards our goal,” she said.

Credit: Matt Golding

The nation’s three largest lenders moved quickly to pass on the rate cut to borrowers, cutting their variable interest rates by 25 basis points. While CBA and NAB will pass on the savings effective February 28, Westpac mortgage holders will have to wait until March 4. Shortly after, ANZ and Macquarie said they would also cut their home loans by 25 basis points.

In forecasts released by the bank, it expected headline inflation to hit the mid-point of the bank’s 2 to 3 per cent target band by mid-2025 but then jump to 3.7 per cent by Christmas as government subsidies wind up in areas such as energy and public transport.

But the RBA expected underlying inflation – a measure excluding volatile items – to be 2.7 per cent by the middle of the year, lower than previously expected. This is partly due to the better-than-expected inflation figures released in January.

One key source of disinflation is across the housing sector. House price growth was weak in the December quarter and the RBA said it had moderated by more than expected. Despite builders reporting some spare capacity, the bank said construction costs remained too high relative to selling prices.

Even excluding the federal government’s boost to Commonwealth Rent Assistance, the RBA said rent inflation was moderating as landlords struggled to find tenants willing to pay high rents and more people stayed with parents or moved into share houses.

The RBA has cut its forecasts for overall economic growth for the 2024-25 financial year to 2 per cent from 2.3 per cent, despite the bank now expecting the public sector – which includes energy subsidies – to grow faster.

However, by the end of next year, it expects GDP growth of 2.3 per cent, which the bank said could keep upward pressure on underlying inflation.

Wages growth is also expected to be a little softer, easing to 3.2 per cent through to the end of 2024 from 4.1 per cent through the 2023-24 financial year.

EY chief economist Cherelle Murphy said the bank would move cautiously, remaining vigilant for any threat to an inflation pick-up including a tight labour market, weak productivity growth, high government spending or price pressures due to a global tariff war.

“We expect the central bank to hold the cash rate steady for now, to assess the March quarter CPI data and the impact of today’s decision on the economy, and in particular, consumers,” she said.

But the Commonwealth Bank’s head of Australian economics, Gareth Aird said a further cut in April could not be ruled out.

He said upcoming reports on the jobs market, including one this Thursday and another mid-March, could reveal weakness and prompt rates action.

“At this stage, we think that it would require two labour force surveys of clear labour market loosening for the board to deliver back-to-back rate cuts,” he said.

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