Australia central bank saw risk of holding tight for too long when cutting rates

AUSTRALIA’S central bank board cut interest rates in February mainly due to the risk of keeping policy too tight for too long, though a strong labour market made it cautious about the chance of further easing.

Minutes of its Feb 18 meeting out on Tuesday (Mar 4), showed the Reserve Bank of Australia (RBA) board showed the decision to ease for the first time in more than four years was a close one, with arguments on both sides.

In the end, the balance of risks led it to reduce the cash rate by 25 basis points to 4.1 per cent.

“Members tended to place more weight on the downside risks to the economy,” the minutes showed. “Members were particularly mindful of the risk of keeping monetary policy too tight for too long.”

However, they also fretted about whether an easing might re-ignite inflationary pressure, given that core inflation at 3.2 per cent was still above the RBA’s long-term target band of 2 to 3 per cent and was not forecast to decline to the 2.5 per cent mid-point anytime soon.

The headline consumer price index rose at an annual pace of just 2.4 per cent in the December quarter, down from a 2022 peak of 7.8 per cent, but that was partly due to downward pressure from government rebates.

As a result, the board agreed that their decision did not commit them to further reductions at future meetings.

“Members expressed caution about the prospect of further policy easing,” the minutes showed.

Speaking after the meeting, RBA governor Michele Bullock had made it clear further easing could not be guaranteed and was dependent on core inflation heading towards 2.5 per cent.

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Market analysts are generally more confident that prices pressures will ease further this quarter with core inflation seen almost certain to fall under 3 per cent.

Markets doubt an easing will come as early as the next policy meeting on Apr 1, but imply around a 65 per cent chance the RBA will cut by another quarter point at the May meeting.

One external risk noted by the board was US President Donald Trump’s plans for tariffs, particularly against China which is Australia’s single biggest export market.

Trump on Monday confirmed tariffs on China, Mexico and Canada would go into effect from Tuesday, sending Wall Street shares sharply lower.

“Uncertainty about US government policy was high and could have a material adverse effect on the propensity of firms and possibly also households to spend,” the minutes showed.