The Reserve Bank of Australia (RBA) is widely expected to begin a series of modest interest rate cuts, starting with a quarter-point reduction to 4.10% on Tuesday, according to a majority of economists surveyed in a Reuters poll. This would be the RBA’s first rate cut in over four years, aligning it with a rate-cutting cycle initiated by other major central banks last year.
Easing inflation, which fell to 2.4% last quarter and is now within the RBA’s 2-3% target range, has prompted several economists to move forward their expectations for a rate cut from the April-June quarter to February 18. A slight dip in economic growth further reduces the need for restrictive monetary policy.
Despite moderating inflation, robust strength in the labor market, persistent wage inflation, and a resilient housing market suggest the RBA will likely adopt a cautious approach to easing.
Over 90% of economists (40 out of 43) in the February 6-13 poll anticipate the RBA to cut its official cash rate by 25 basis points to 4.10% at the conclusion of its two-day policy meeting on February 18. Interest rate futures are pricing in a near-80% probability of such a move.
“The prudent action for the RBA now would be to cut, but cut slowly and just see how data evolves through time. The worst thing they could possibly do is cut hard and then have to reverse,” said Craig Vardy, head of fixed income, BlackRock Australasia.
All major local banks (ANZ, CBA, NAB, and Westpac) are forecasting a 25 basis point cut on Tuesday and project a cumulative 50-100 basis points of rate cuts this year.
Over 75% of respondents (31 out of 41) with a long-term perspective expect another quarter-point cut in the April-June quarter, bringing rates to 3.85%. Median forecasts indicate the interest rate will drop to 3.60% by end-September, followed by an extended pause until at least early 2026, resulting in a total of 75 basis points worth of rate cuts in this cycle.
Analysts predict inflation will average 2.8% this year, with the economy growing by 2.0%, according to a separate Reuters poll.
“They’ve pretty much got the green light to go from an inflation standpoint,” said Vardy. “We think probably three rate cuts perhaps this year and the risk is we only get two. But getting towards a 3-1/2% nominal neutral level – that’s probably where they’ll end up.”
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