Australia Interest Rate Cut: AU’s central bank cuts rates for first time in four years

• The Reserve Bank of Australia cut interest rates by 25 basis points, taking them to 4.10%, the first cut by the central bank since November 2020.

• The move is aimed at helping the economy grow, as inflation has fallen significantly, but the RBA has been cautious about signalling further cuts.

• As Australia’s federal election approaches, questions are growing about whether the move will have economic and political implications.

Introduction:

For the first time in four years, the Reserve Bank of Australia has chosen to cut interest rates from 4.35%, where they have been since November 2023, in a move aimed at easing the burden on Australian households and businesses that have been suffering from the highest interest rates since 2012.

The RBA is lagging behind major central banks that began cutting Australian interest rates last year, after many economies began to feel relatively reassured about inflation.

This will ease the burden on households and businesses that have been dealing with rising costs.

Why the cut? Finally, inflation is slowing!

Inflation in Australia has slowed nicely recently, with the annual core CPI coming in at 3.2%, while the annual CPI came in lower than expected at 2.4%, in the fourth quarter of 2024, which is close to the Reserve Bank of Australia’s required inflation rate of 2-3%, giving Reserve Bank officials the power to decide to cut interest rates for the first time in four years, by a quarter of a percentage point, after a journey of high interest rates that began in 2022 to combat high inflation rates at the time.

The good news about the decline in inflation rates in Australia is that the prices of goods such as groceries, gasoline and daily necessities are not rising as quickly as they were.

However, the Reserve Bank of Australia has not promised any future interest rate cuts, as they are waiting to see what happens with inflation over the next few months.

If inflation continues to decline, another rate cut is due later in 2025, but if inflation does rise again, the Reserve Bank has indicated that there will be no rate cut in the near future, according to Reserve Bank of Australia Governor Michelle Bullock, who stressed the need to continue monitoring future inflation readings.

Political test after this Australia interest rate cut:

This rate cut is not only about inflation and mortgages, but it may also be politically charged, with the country's federal election approaching, as the government hopes this move will give people some freedom and increase their confidence in the economy.

While some experts believe that Australian families are still suffering from previous price increases, and the cost of living remains a major concern for them.

Prime Minister Anthony Albanese and his government will therefore have to show that they have a strong economic plan, especially in matters that will contribute to controlling inflation in a way that alleviates the burden of high costs that Australians are exposed to.

The Reserve Bank of Australia’s interest rate cut is a major story, a shift in policy after years of high borrowing costs.

Will inflation continue to fall enough to help the RBA cut rates again?

And will this cut have any implications for the upcoming election?