Australia’s central bank is proceeding with caution on further interest rate cuts, mindful of persistent cost pressures within a strong labor market. However, it remains prepared to adjust policy if inflation decreases more rapidly than anticipated, according to senior officials on Friday.
In a statement before lawmakers, Reserve Bank of Australia (RBA) Governor Michele Bullock emphasized that while the central bank is considering potential rate cuts, it must be prudent in its approach. She stressed that the RBA is not committed to a predetermined course and will make decisions based on the latest economic data. “We may reduce rates further, but we need to be careful,” Bullock remarked. “Our approach will remain data-driven, and patience will be required.”
Earlier this week, the RBA reduced the official cash rate by 0.25 percentage points to 4.1%, marking the first rate cut in over four years. Bullock explained that the reduction was driven in part by a desire to act before a more significant delay, noting that the RBA had already fallen behind other major central banks in adjusting its policy.
Despite the recent rate reduction, the RBA warned against expecting further immediate cuts. One key challenge is the unexpectedly strong performance of the labor market, which could fuel cost pressures and hinder efforts to bring core inflation into the RBA’s 2%-3% target range.
Over the past year, Australia’s labor market has remained resilient, with the unemployment rate hovering near 4%. Although inflation has decreased from a peak of 7.8% in late 2022 to 2.4% in the fourth quarter of 2024, and wage growth has moderated, the RBA considers the labor market to be tight, suggesting potential inflationary risks.
Officials noted that the central bank continuously reassesses its outlook, acknowledging the possibility of being mistaken in its projections. “If inflation falls more swiftly than expected, we will adjust policy accordingly,” said Deputy Governor Andrew Hauser. “But we’d rather wait for confirmation than assume that outcome.”
Hauser further clarified that central banks do not always continue easing once they begin cutting rates, underscoring the RBA’s cautious stance.
Market expectations suggest a modest chance of further rate cuts in the near term. Swaps markets indicate a 17% probability of a rate reduction in April, with a 70% chance of a move in May. For the year ahead, investors anticipate just 40 basis points of easing, which equates to less than two quarter-point reductions.
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