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The central bank has outlined the key factors behind its decision to lower interest rates in February, but flagged it is not committed to further reductions.
The Reserve Bank of Australia (RBA) has revealed that easing inflation and slowing wage growth were the two major reasons driving its decision to drop the cash rate for the first time since November 2020.
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In the minutes of the February 2025 RBA board meeting, members said that inflation in the December quarter had been weaker than expected, with underlying inflation already close to the midpoint of the target range on a six-month annualised basis.
Wage growth had also been a little softer than expected, members said, with the prospect of it picking up likely to diminish given inflation had declined and considering firms were adjusting to weaker productivity growth.
The long-awaited decision to cut the cash rate by 25 bps from 4.35 per cent to 4.10 per cent marked the beginning of the first rate-easing cycle for four years. It broke the streak of nine consecutive announcements where the central bank kept the cash rate unchanged.
Members said that the composition of inflation – with lower house building costs and the pace of increase in rents and insurance premiums moderating – had been favourable and that this was also a factor in the cash rate call.
The RBA board minutes showed that the bank would have decided to keep the cash rate at 4.35 per cent if there had been strong labour market conditions, faster-than-expected growth, and global uncertainties, particularly around US policy and tariffs.
Summarising the RBA board’s decision, the minutes said: “Members judged that the continued fall in underlying inflation, and at a somewhat faster pace than expected, meant that the upside risks to inflation had abated enough that they no longer needed the insurance they had taken out when raising the cash rate target in November 2023.”
The board said that it was “mindful of the risk of keeping monetary policy tight for too long, with adverse impacts on economic activity, the labour market and inflation”.
When are more cuts coming?
Despite a majority of banks and economists forecasting more rate drops this year, RBA members expressed caution about the prospect of further policy easing.
The minutes for the February meeting said that while economic outcomes had given members “more confidence that they could return inflation to target at the same time as preserving most of the gains in the labour market with a lower cash rate”, they agreed that this was not yet assured.
“In light of these considerations about the risks surrounding the Board’s decision, members agreed that their decision at this meeting did not commit them to further reductions in the cash rate target at subsequent meetings,” the minutes said.
Members also said that while central banks in other countries had lowered interest rates several times, rates in Australia had not risen as high as elsewhere and the domestic labour market was much stronger than in other economies when their central banks first lowered interest rates.
As a result, members expressed caution about further policy easing. Members said again that future decisions would be guided by the incoming data and evolving risks.
Returning inflation to target remained the RBA’s highest priority, the minutes said.
‘A hawkish tone’
Commonwealth Bank of Australia (CBA) head of Australian economics Gareth Aird described the February RBA board minutes as “hawkish” and said they highlighted that the board had recently increased its emphasis on hitting the midpoint of the 2–3 per cent inflation target range.
Aird said that the tone of the minutes implied the “board is unconvinced that further easing is necessary over the period ahead”.
“Ultimately we think that it will boil down to the inflation data for the RBA’s next policy move,” he said.
CBA expects the RBA to leave the cash rate on hold in April and resume cutting the cash rate by 25 bps in May.
Adam Boyton, head of Australian economics at major lender ANZ, said: “On the policy target, the minutes make clear that the [inflation] midpoint is the focus.”
Boyton reasserted the bank’s forecast for one more rate cut this year, likely at the August meeting.
However, he said that the risks to that view are starting to look “a little more offshore than domestic”, with a global economic deterioration adding to the likelihood of more easing.
[Related: RBA cuts cash rate for first time in 4 years]
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