The RBA Rate Cuts Rates for the First Time Since 2020

Summary

• The RBA has cut the target cash rate by 25 basis points to 4.1%, citing faster-than-expected inflation moderation.
• Capacity pressures are easing, with businesses struggling to pass on costs amid subdued consumer demand.
• The labour market remains historically tight, driven by strong growth in healthcare employment.
• Global trade uncertainty, including US tariffs and China’s economic slowdown, presents risks to Australia’s outlook.

RBA Cuts Cash Rate Amid Inflation Moderation

• Following its February 2025 meeting, the Reserve Bank of Australia (RBA) announced a 25-basis-point reduction in the cash rate, lowering it from 4.35% to 4.1%. This marks the first adjustment since November 2023, when the rate was raised in response to persistently high inflation following the COVID-19 pandemic.
• In its statement, the RBA cited a faster-than-expected decline in trimmed mean inflation over late 2024 as the key driver behind its decision. December inflation data indicated a more rapid return to the target range than previously forecast in the Bank’s November projections. However, the RBA signalled caution, acknowledging heightened global political uncertainty, including ongoing conflicts in the Middle East and Ukraine, as well as potential trade disruptions stemming from the newly implemented protectionist policies of the US administration.

Easing Capacity Pressures in the Economy

• Business conditions suggest that firms are increasingly constrained in their ability to pass cost increases onto consumers, given subdued demand. Higher borrowing costs have contributed to a reduction in household spending, as debt servicing absorbs a larger share of disposable income. This has led to softer demand across sectors such as retail, household services, and agriculture.
• Housing market dynamics also reflect these trends, with rental prices showing signs of decline toward the end of 2024. In response to demand-side pressures, businesses are focusing on productivity improvements to contain costs and sustain profit margins.

Labour Market Conditions Remain Tight

• Despite moderating economic conditions, Australia’s labour market remains historically tight. Both unemployment and underemployment rates remain low, while job vacancies continue to exceed pre-pandemic levels. Labour force participation has reached a record high, driven in large part by non-market sector employment growth—particularly in healthcare.
• Labour reallocation is evident, with sectors such as hospitality and arts and recreation experiencing worker outflows toward healthcare. Businesses in these industries continue to report labour shortages as a significant operational challenge. However, the sustained demand for healthcare workers does not appear to be driven by outsized wage growth, with healthcare wages tracking closely to overall wage price index movements.

Inflation Expectations Well-Anchored

• Survey-based and financial market measures indicate that inflation expectations have returned to target range. The RBA’s research highlights the role of household and union expectations in shaping actual inflation outcomes, with most individuals forming their expectations based on recent lived experience. The return of long-term inflation expectations to within the target band suggests that Australian households are beginning to see price stability reflected in their day-to-day spending, reinforcing confidence in future purchasing power.

Trade Policy Uncertainty and Its Implications

• The introduction of new US tariffs raises concerns for global trade stability, with potential downstream effects on Australia’s economic outlook. While the direct impact of recently announced tariffs on Australian exports—specifically targeting steel and aluminium—remains limited, broader trade restrictions could disrupt global supply chains and add to inflationary pressures worldwide.
• Protectionist policies typically lead to higher consumer prices as import costs rise to match domestic alternatives. Additionally, shifts in global production patterns may constrain GDP growth in affected economies, complicating the RBA’s ability to assess international demand conditions.

China’s Economic Outlook and Implications for Australia

• China’s economic trajectory remains a critical factor in shaping Australia’s trade prospects. In response to a sustained downturn in its housing market since 2022, Chinese authorities have introduced fiscal stimulus measures aimed at boosting domestic consumption and offsetting declining real estate investment.
• China’s 5% growth target has faced challenges but showed signs of resilience in late 2024, driven by a surge in merchandise exports to the US ahead of anticipated tariff implementations. However, as these new trade policies take effect, weaker Chinese export demand could suppress GDP growth, lower employment, and reduce investment. A slowdown in China would likely dampen demand for Australian commodities such as iron ore, which remain vital to Australia’s economic performance.

What this means for you

With interest rates now easing and global uncertainty persisting, businesses and policymakers must carefully assess risks and opportunities in the current economic climate. Understanding how monetary policy, labour market dynamics, and international trade shifts impact your operations is critical to strategic planning.

At NineSquared, we provide data-driven economic insights to help businesses, government agencies, and industry stakeholders navigate these evolving conditions. Get in touch with us today to discuss how we can support your decision-making with tailored economic analysis and strategic advice.

Contact us

https://ninesquared.com.au/contact/

info@ninesquared.com.au