RBA offers rates relief but won’t declare victory over inflation

The Reserve Bank has pushed back against market expectations of further rate cuts into next year with governor Michele Bullock saying it ‘cannot declare victory’ over inflation.

Reserve Bank of Australia governor Michele Bullock said uncertainty around the global outlook was also clouding the economic path for Australia. Picture: NewsWire / John Appleyard

In delivering a widely expected interest rate cut the Reserve Bank has carefully managed expectations of further interest rate relief, with governor Michele Bullock saying it “cannot declare victory” over inflation.

A 25 basis points cut in the cash rate to 4.1 per cent was justified because inflationary pressures were easing “a little more quickly than expected”, there was continued subdued growth in private demand and wage pressures have eased.

“These factors give the board more confidence that inflation is moving sustainably towards the midpoint of the 2-3 per cent target range,” the RBA board said in its decision statement.

However, lowering inflation “remains the board’s highest priority” and “upside risks remain”.

Recent labour market data were “unexpectedly strong”, suggesting that the labour market may be “somewhat tighter than previously thought”. Productivity growth had not picked up, which “implies that growth in unit labour costs remains high”.

The sharemarket weakened after the announcement. After hitting a record high of 8615.2 points last week, the S&P/ASX 200 index fell 0.7 per cent to 8481 points, its lowest close in almost two weeks. Government bond yields rose about five basis points but the Aussie dollar was little changed.

Moreover, the RBA’s forecast for underlying inflation was revised up from 2.5 per cent to 2.7 per cent for 2026, and was expected to remain there until at least mid-2027.

“So, while today’s policy decision recognises the welcome progress on inflation, the board remains cautious on prospects for further policy easing,” the RBA’s decision statement said.

Ms Bullock said the board “judges it’s time to reduce a little bit of that restrictiveness, but we cannot declare victory on inflation just yet”.

“It is not good enough for inflation to be back in the target range temporarily, the board needs to be confident that it is returning to the target range sustainably.”

Ms Bullock said the decision to cut interest rates at the meeting “wasn’t a lay down misere”.

Rather it was a “difficult decision in the sense that there are arguments on both sides”.

“And what I would say is that the board had a very active debate of the arguments on both sides on this but in the end, came to the view that the better decision was to ease a little bit of the restrictiveness,” she said. “Still maintain some restrictiveness, but ease a little bit of restrictiveness in recognition that we are making progress towards our goal. I under-stand that many households will be relieved with this.

“But the important point that I’ve made before is that it’s really important we beat inflation, because that hurts absolutely everyone.”

Significantly, Ms Bullock also pushed back against the market pricing of 60 basis points of further rate cuts by mid-2026 that was used to derive the RBA’s forecasts of underlying inflation remaining above the midpoint of its 2-3 per cent target band through mid-2026.

“What I would say is that the market is expecting quite a few more interest rate cuts to the middle of next year – about three more on top of this,” she said.

“Whether or not that eventuates is going to tend very much on the data.

“Our feeling at the moment is that that is far too confident, that that’s as many rate cuts as we’ll be having.”

Ms Bullock went on to confirm that the RBA was targeting the midpoint of its 2-3 per cent target band, given that its inflation forecasts – based on market pricing – now project underlying inflation no lower than 2.7 per cent in the forecast period market pricing was “unrealistic”.

After Ms Bullock’s press conference, market pricing implied 40 basis points more cuts by December.

She clarified that the RBA now targets the midpoint of its 2-3 per cent inflation target band.

“So it’s really think it is important that we target the middle of the band,” she said.

“We’re not always going to hit bang on the number, but it gives us the best chance of staying within the band that we can.”

One of the big questions the RBA was grappling, now that inflation was easing, was the “surprising” strength of the labour market.

“Many indicators suggest that the labour market is tight, and on some measures, tightening further,” she said.

“While this is good news for jobseekers, the board remains alert to the possibility that it is signalling a bit more strength in the economy, which could delay or stall the disinflation process.”

Ms Bullock said uncertainty around the global outlook was also clouding the economic path for Australia.

“At the moment, one of the things we’re cautious about is the possibility that policy unpredictability could lead to slower growth,” she said. “But at the moment, it’s still it’s too soon to tell.

“For these reasons, I want to be very clear that today’s decision does not imply that further rate cuts along the lines suggested by the market are coming.”

Still, Ms Bullock said part of the reason why the RBA decided to cut interest rates this month was because “we want to make sure, if we can, that we don’t miss the turning point” on inflation.

Economists mostly continued to expect further interest rate cuts this year.

“Our base case is for the RBA to deliver further 25 basis points rate cuts in May, August and November for an end year cash rate of 3.35 per cent,” said Commonwealth Bank head of Australian economics, Gareth Aird.

“The near-term risk sits with another rate reduction in April if the labour market data loosens more materially over coming months.”

For back to back rate cuts, he said the RBA would need two labour force surveys of clear labour market loosening and March quarter underlying inflation of no more than 0.7 per cent on-quarter.

But National Australia Bank said that with the RBA clearly waiting for the next quarterly CPI data, the next “live” RBA meeting is May rather than April.

“NAB expects the RBA to cut rates again in May, but that is based on ongoing continued progress on inflation,” said NAB head of market economics, Tapas Strickland. “We still see the RBA getting the cash rate back to 3.1 per cent by early 2026, though it is clear inflation will need to make the case and be at the midpoint for this to occur, bar a greater-than-expected loosening in the labour market.”