The Reserve Bank of Australia delivered long-awaited financial relief to mortgage holders, cutting interest rates for the first time in more than four years.
The widely-expected move to lower the official cash rate target by 25 basis points to 4.1 per cent on Tuesday was immediately followed by lenders vowing to pass the decrease on in full.
The cut marks the start of a much-anticipated monetary easing cycle following 13 rate rises since May 2022, which left interest rates at their highest level in 15 years.
In its post-meeting statement, the board struck a hawkish tone, which will bolster economists’ expectations of a shallow easing cycle.
“Some recent labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat tighter than previously thought,” it said.
“While today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing.”
The rates market had priced in a 90 per cent chance of a cut ahead of the meeting, following a softer-than-expected underlying inflation print for the December quarter.
But economists were less certain. Of the 32 economists polled, 22 per cent expected a hold.
Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, expected the bank to tread lightly from here on, delivering only two more cuts in 2025.
“This is an unusual economic environment for the RBA to be cutting rates in,” he said.
“The labour market is beyond capacity, services inflation is running above 4 per cent, and momentum in consumer spending is improving.
“But the weaker-than-expected Q4 CPI print was enough to outweigh these factors and spur the RBA to cut.”
Mortgage holders have been struggling to keep up with high interest rates, with mortgage arrears rising steadily from the record low of one per cent in mid-2022.
If lenders pass the cut on in full, borrowers with an average home loan of $641,416 can expect to save over $100 per month, according to financial comparison site Finder.
The big four banks – Westpac, ANZ, NAB and the Commonwealth Bank immediately announced they would be passing on the rate cuts in full to variable rate home loans, effective February 28.
Treasurer Jim Chalmers said the rate cut was very welcome news for millions of Australians.
“This is the rate relief Australians need and deserve,” he said.
“It won’t solve every problem in our economy or in household budgets but it will help.
“This is the soft landing we have been planning for and preparing for but we know there’s more work to do.”
The RBA in its Statement on Monetary Policy, released alongside its rate decision, said it had underestimated how tight the jobs market would be.
As a result, it expected underlying inflation to remain above the midpoint of its two to three per cent target range for longer than expected.
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