So for the first time in over four years the Reserve Bank of Australia (RBA) has cut the official cash rate by 25 basis points to 4.1%. They fired the gun they've loaded it for the possibility of more but are they blanks? Let's drive into what was said in the statement, what outlook was given and what this means for the Australian dollar and your trading going forward.
First – the action. The RBA made its first move in over a year 15 months to be exact, cutting the cash rate by 25 basis points to 4.1% at its February meeting. This marks the first rate reduction since November 2020, and marks what looks to be the other side of the “Table Top” mountain effect for the cash rate as we had discussed when the hike cycle began.
While the cut itself was widely expected - the RBA went full hawk in explaining what the outlook and rate cutting cycle will look like particularly on expectations of an extended easing cycle. To really highlight this point, have a look at the AUD when RBA Chair Michele Bullock was speaking on this point during her press conference. The short reversal is telling.
The crux of the whole position is - the RBA acknowledges progress on inflation but remains cautious about declaring victory. And that is a fair position to hold, core inflation is running at 3.2% and headline at 2.4%. Yet the bank is forecasting headline inflation to flare to 3.7% come December with core (trimmed mean) at 2.7% unchanged for TWO AND A HALF YEARS!
It reflects a delicate balancing act—while inflation is tracking lower, the labour market remains unexpectedly tight. The central bank wants (needs) more evidence before committing to further cuts, making it clear that markets are getting ahead of themselves hence the moves in the AUD. It begs the question: Why Cut Rates Now?
The Inflation-Labor Market Trade-Off Clearly the RBA’s decision to ease policy was largely driven by better-than-expected inflation data in Q4 2024. Disinflation has been happening faster than anticipated, which gave the central bank confidence to remove some policy restrictiveness, which it has always said it would as soon as it thought it could. But inflation is only one side of the equation.
The flip side is the labour market – which is hot and running hotter than expected. Unemployment remains at 4.2%, below the RBA’s estimated full employment level of 4.5%. While job vacancies have eased slightly, demand for workers remains strong, which could keep wage pressures elevated.
Caveat – the wage price index the day after the RBA meeting came in at 3.2% meaning in real wages terms wages growth is 0. But – it still presents a risk: easing too much too soon could reignite inflation, particularly in wage-sensitive sectors like services. Hence the hawkish stance.
As mentioned inflation is projected to settle at 2.7%—still above the 2.5% midpoint of its target range—while unemployment is expected to remain relatively low. This suggests that the RBA is not entirely convinced that inflation will continue declining without further policy restraint. The central bank is effectively saying: "We’ll cut where possible as we don’t want to leave policy restrictive any longer than necessary, but we’re not ready to call this the start of a full easing cycle." Is this just new aged jawboning?
Moderating the Market We feel we are now entering a new phase – upside jawboning a deliberate ploy to temper market expectations and more importantly – the consumer. The concern is that easing policy could trigger a rebound in spending, asset prices, and broader economic activity—creating inflationary pressures that could undo recent progress. This is why Governor Michele Bullock took a firm stance in her press conference, directly challenging the market’s expectation of multiple rate cuts and described the market’s pricing—which holds three additional cuts in 2025—as " far too confident." In short the Board’s message is clear: February’s cut does not automatically signal a sustained easing cycle.
The Board remains data-dependent and will only consider further rate reductions if inflation risks subside and the labour market shows definitive signs of cooling. What’s the biggest threat to the RBA? The Federal Election and Fiscal Policy Never underestimate a government and spending money – which makes fiscal policy risk number 1.
With a federal election due by May 17, government spending could play a significant role in shaping the economic outlook. If fiscal stimulus is ramped up, through cost-of-living relief measures or infrastructure spending, it will add upward pressure to inflation, thus reducing the urgency for further rate cuts. The RBA has explicitly stated that its forecasts do not assume any additional election-driven spending, meaning any surprises on this front could alter the rate outlook and the 3.7% headline figure could be worse.
Consumer and Housing Market Reactions Another key factor is how households respond to this rate cut. If consumer confidence rebounds strongly and household spending picks up, this may also signal a reassessment. Housing both prices and construction activity will be other critical indicators.
A surge in property market activity, driven by lower borrowing costs, could create renewed inflationary pressures, forcing the RBA to hold back on further cuts. And let’s be honest this has happened every easy cycle. Global Economic, Geopolitics The broader global economic landscape also plays a role.
If central banks in major economies, such as the US Federal Reserve, move more aggressively on rate cuts, this could influence the RBA’s decision-making. A more dovish global monetary environment could ease financial conditions in Australia, allowing the RBA to be more patient in its approach. Counter this with trade tariffs, trade wars and tit-for-tact reactions that increase inflation may lead to not only a long pause but also the risk of hikes.
Crystal ball time For now, the market has a cut fully priced in by the July meeting but the risk of a delay is growing. The RBA’s cautious approach suggests it wants more time to assess how inflation, employment, and economic activity evolve before making another move, suggesting September is a more likely month for the next cut, all things being equal. Ultimately, the path forward remains highly uncertain.
This means the central bank is unlikely to move quickly, and expectations of a rapid series of rate cuts may need to be revised. Hence as traders the AUD weakness may now have found a floor as cuts are not going to be as forthcoming. In short: while this cut marks the beginning of policy easing, it’s far from a signal that the RBA is on an aggressive cutting path.
The data will dictate the next steps, and for now, the Board remains firmly in watch-and-wait mode.
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