RBA trims official rate to 3.85% on global uncertainty and softening inflation outlook

The Reserve Bank of Australia (RBA) has cut interest rates by 0.25 of a percentage point to 3.85% in a move that most markets and economists expected.

It is the second cut this year and sees the nation’s official cash rate drop from 4.1% to its lowest level since May 2023.

The RBA board had reportedly weighed up the possibility of a 0.50 percentage point cut before consensus was reached on 0.25%.

Mortgage savings

Australia’s big four banks were quick to pass on the rate cut in full, providing further relief to mortgage holders amid the cost of living crisis.

It means that homeowners with a $500,000 mortgage will save around $79 a month or $947 a year, while those with a $750,000 commitment will save $118 per month or $1,420 per year.

But while lower interest rates will make life easier for existing mortgage holders, it is not great news for those looking to buy their first home.

The cash rate cut will give buyers more borrowing power and is set to push up housing prices across the country, making it more costly to enter the property market.

Welcome relief

Federal Treasurer Jim Chalmers was confident the cut would be well received.

“Today’s interest rate cut does not mean that the job is finished when it comes to the cost of living, but it will help millions of Australians with a mortgage,” he said.

“This is very welcome relief for millions of Australians—we are really pleased to see more help is on the way and that is what this decision today is all about.”

Inflation stable

The RBA has attributed the rate cut to stable inflation, which has fallen substantially from its 2022 peak as higher interest rates have worked to bring aggregate demand and supply closer towards balance.

By the end of the March quarter, annual trimmed mean inflation sat below 3% for the first time since 2021 and headline inflation sat at 2.4%.

“With inflation expected to remain around target, the board has judged that an easing in monetary policy at this meeting was appropriate [and] noted that [the policy] is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia.”

Economic uncertainty

Global economic unrest is likely to shape the future rate outlook.

“Geopolitical uncertainties remain pronounced and these developments are expected to have an adverse effect on global economic activity… they have also contributed to a weaker outlook for growth, employment and inflation in Australia,” the bank said.

“While the central projection is for growth in household consumption to continue to increase as real incomes rise, recent data suggest that the pick-up will be a little slower than was expected three months ago.”

Global insecurity

Mr Chalmers said Australia was one of few outliers amid the current global economic insecurity.

“We have not had to pay for progress [on inflation] with substantially higher unemployment or a substantially slower economy and that makes us unusual around the world,” he said.

“Australia is better placed and better prepared than most to deal with global economic uncertainty and today’s interest rate cut reflects that.”