The Reserve Bank of Australia (RBA) reduced its benchmark cash rate by 25 basis points to 4.1% on 18th February 2025, marking its first monetary policy move since November 2023.
The central bank’s decision came as evidence emerges of easing inflation, slowing private sector demand, and moderating wage pressures, giving policymakers increased confidence that inflation is on a sustainable track toward the 2.0%-3.0% target range.
However, the RBA has emphasized it remains cautious, wary of loosening policy too far and too soon, as disinflation – or the reduction of the inflation rate – could stutter, and inflation could settle above the desired level.
Inflation readings have declined slightly faster than expected, illustrated by a trimmed mean inflation of 3.2% year-on-year in Q4 (down from 3.5%), while December’s CPI reading stood at 2.5% year-on-year. Nonetheless, these figures still exceed the RBA’s target band and the central bank would prefer to see figures in the low end of the range.
Meanwhile, the labor market continues to show surprising strength: unemployment is at 4.1%, and the January job gain of more than 44,000 surpassed forecasts of 20,000+ jobs, driving employment growth of 3.5%—outpacing population growth of 2.1%.
The joker in the pack
One of the significant external uncertainties facing the RBA is the evolving geopolitical climate, particularly the unpredictability surrounding the Trump administration’s trade policies and tariff strategies.
Loved as being a wildcard candidate who doesn’t recognise the status quo, Donald Trump has turned global trade relations on its head, as well as global security settings.
While markets have moderated expectations for further rate cuts in other major economies, such as the United States, shifting tariffs and trade restrictions remain a threat. Ongoing disputes or new levies could undermine global demand, disrupt supply chains, and potentially rekindle inflationary pressures.
As a result, the RBA is proceeding warily, balancing domestic economic indicators against these uncertain international developments.
