The Reserve Bank of Australia has lowered the cash rate target to 4.1%, dropping 0.25%. The exchange settlement balance interest rate has been reduced to 4%.
“Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority,” it affirmed.
Inflation has been decreasing since 2022 peaks, the bank said, with underlying inflation in the December quarter measuring 3.2%. As this figure has fallen faster than anticipated, alongside subdued private demand and wage pressures, the bank’s board stated its confidence that the inflation midpoint is moving towards a 2-3% target range.
Despite these positive findings, the bank warned that it was cautious about easing policy further. Predictions for central underlying inflation have risen slightly for 2026. “If monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range. In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook,” it stated.
A number of risks are still in play, it explained, citing weak output growth, sluggish private domestic demand and uncertainty about household spending recovery. Additionally, strong labour market data domestically implies a tighter market than expected but productivity growth has not developed in tandem.
It is not certain whether these are necessarily negative factors. “There is a risk that any pick-up in consumption is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market than currently projected. Alternatively, labour market outcomes may prove stronger than expected, given the signal from a range of leading indicators,” the bank said.
As is the situation globally, geopolitical and policy issues are also of concern.
The bank concluded that it will continue to assess data and risks to guide its decisions, looking at indicators including domestic demand, Australian and global financial markets and labour market trends.
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
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