One and done? RBA cools hopes over fast interest rate relief

In delivering a long overdue rate cut, the central bank has a sobering message when it comes to more.

The good news is Australia is finally on the way out of its high-cost folly with inflation. However, in delivering its first interest rate cut in four years, Michele Bullock’s Reserve Bank has a sobering message about the next one: We could be waiting longer than many were hoping for.

The 25 basis point cut to 4.10 per cent comes just in time for the election, with flagging Anthony Albanese needing a tangible win on the economy. More importantly, it's long overdue break for homeowners and squeezed businesses, although only at the margins.

Banks are acutely aware of the pressure of higher rates on some of their customers. Within minutes of Tuesday’s move, each of the big four – ANZ, CBA, NAB and Westpac – promised to pass on the cut in full.

In previous rate cut cycles homeowners would often have to wait days to find out.

Bullock believes there is enough wiggle room in a slowing economy to lower rates without stoking inflation.

It was a finely judged call to cut rates, she says, which strongly suggests further cuts are off the table in the very near term at least.

Indeed, in making the rates call RBA said while the trend of inflation has been easing and it is confident it can eventually return to the midpoint of its target range, it could be a slower grind than previously expected.

A tight jobs market has the potential to add more fuel to wage claims, and unions are starting to flex the muscle gifted to them by Albanese’s industrial relations changes.

BHP chief executive Mike Henry says the tilt back to regulation of the labour market means Australia is going to have to “work extra hard” in other areas like productivity, tax policy or energy to make sure Australia remains competitive.

Worryingly, the bank’s central forecast for inflation has been revised up a little and its the tight jobs market that risks another round of wage hikes, has Bullock and her board worried.

Where it had been hoping underlying inflation to hit 2.5 per cent by December next year, it is now expects this will be 2.7 per cent. The central bank is also tipping weaker growth, given sluggish effort from the big two states of NSW and Victoria.

Bullock says its important to keep the inflation target fixed on the 2.5 per cent number, as the best chance to hit it.

This could change the pace of future rate cuts compared to where the market had been tipping, she added.

Going into this meeting economists had been looking at another cut from the July meeting and a third cut by the end of the year or early next year. This is now not so certain.

Australia was late in to the rate hike cycle and is late out.

It is only now catching up to the rate cuts started most central banks mid-to-late last year including the likes of the US Federal Reserve, European Central Bank and Bank of England.

Finally some relief for households feeling the financial pinch.

Already, economists are rethinking their expectations around the pace of further cuts – particularly in the US – where Trump’s tariffs are about to take hold. And this is the economic arena the RBA has now stepped into.

Inflation hasn’t been brought under control in the economies where cuts have taken place, and this is worrying some. Indeed, in the UK, inflation is expected to spike again in the coming year before drifting lower.

The Reserve Bank of New Zealand, often regarded as the lead indicator for most central banks, began to cut its punishing cash rate last August but is also having second thoughts around more.

While it is good news that inflation is going in the right direction, the RBA’s Bullock is clearly worried about activity in the economy stoking it again.

Last week, Commonwealth Bank boss Matt Comyn said there were early signs his customers were starting to spend more on discretionary items again. This follows tax cuts and wage rises and energy bill relief of the last six months making it into household pockets.

The experience overseas is inflation can be bumpy, Bullock says. “It’s not a smooth ride”.

“What we’ll be looking for is continued disinflation. If that starts to reverse course...then that is going to be something the board would seriously need to consider,” she says.

There’s also the major uncertainty of a global trade war between the US and China. It is watching for other inflation hotspots, beyond the tight labour market such as whether a recovery in household spending in late 2024 will persist.

If the cash rate is cut too fast, Bullock is clearly worried the gains in inflation so far could stall, and even worse, take longer than its now extended glide path to hit the target level.

Australians have been given a small reprieve on the cash rate, but we shouldn’t be banking on more coming our way too quickly.

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Originally published as One and done? RBA cools hopes over fast interest rate relief