The Reserve Bank of Australia (RBA) has kept its cash rate target at 4.35 per cent for over a year, the longest period of stability since rates began rising in May 2022. However, with inflation now within the target range, economists believe the central bank may soon announce a rate cut.
The RBA’s decision will be closely watched, with its first meeting of the year scheduled for February 19 and 20. If a cut is made, it could offer some relief to mortgage holders who have faced increasing repayments since the cash rate climbed from 0.1 per cent in 2022.
Inflation trends and monetary policy decisions
The RBA’s primary mandate is to maintain inflation between 2 and 3 per cent over the medium term. After rapid inflation growth in recent years, the central bank raised the cash rate from 0.1 per cent in May 2022 to 4.35 per cent in November 2023, where it has remained for the past 15 months, according to the Australian Bureau of Statistics (ABS).
Recent Consumer Price Index (CPI) data indicates that headline inflation has now fallen to 2.4 per cent, within the RBA’s target range. However, the central bank has placed greater emphasis on underlying inflation, particularly the trimmed mean, which excludes volatile price changes. According to the ABS, the trimmed mean inflation rate remains at 3.2 per cent, still above the RBA’s preferred range.
Despite this, economists from Australia’s big four banks anticipate a 0.25 percentage point cut, which would bring the cash rate down to 4.1 per cent. This decision will depend on whether the RBA believes inflation is sufficiently under control to begin easing its monetary policy stance.
Impact on interest rates and the broader economy
A cut to the cash rate would not automatically reduce mortgage interest rates, as individual banks decide whether to pass on reductions to borrowers. However, lower rates could provide relief to homeowners who have faced rising repayment costs since 2022.
The central bank also seeks to avoid economic stagnation, as high interest rates slow down consumer spending and business investment. Monetary policy adjustments often work with a 12- to 24-month lag, meaning the RBA must balance inflation control with preventing an economic downturn.
The last time the cash rate was higher than 4.35 per cent was in November 2011, when it stood at 4.5 per cent. After that, the RBA progressively lowered rates, eventually cutting them to 0.1 per cent in November 2020 to support the economy during the COVID-19 pandemic.
According to the RBA’s meeting schedule, if a rate cut is not announced in February, the next opportunity will be in March or April. With inflation gradually falling and economic pressures mounting, the coming months will be crucial in determining the future direction of Australia’s monetary policy.
