February RBA Review: The Pace of Rate Cuts Will Slow Down
2025-02-20
■ The Reserve Bank of Australia decided to cut interest rates for the first time since November 2020 and said it would promote easing policies at a moderate pace in the future
■ Financial markets have reduced their expectations for the number of interest rate cuts, and in the short term, attention should be paid to the labor market and domestic demand trends
The Reserve Bank of Australia (RBA) held its first board meeting of the year from February 17 to 18 and decided to cut the policy rate (OCR) from 4.35% to 4.10%. Although this is the first rate cut since November 2020, the market's attention has shifted to the pace of future rate cuts as the financial market has digested this expectation. Overall, although the RBA has started a rate-cut cycle, the signal released by this meeting indicates that the pace of rate cuts will be slow.
The quarterly financial policy report (SMP) was also released at this meeting. Among them, the RBA lowered its expectations for real GDP growth before June 2025, but at the same time maintained the outlook for continued economic recovery and positive growth before June 2027. In addition, the RBA also lowered its unemployment rate forecast for June 2027, adjusting the peak unemployment rate from the previous 4.5% to 4.2%. Based on these adjustments to the forecasts for economic growth and the labor market, the RBA believes that there is no need to rush to cut interest rates at present.
This view was also directly reflected in the statement after the end of the board meeting and the speech of RBA Governor Bullock. The statement specifically added the following: "We remain cautious about the prospect of further policy easing." In addition, Governor Bullock said that it is too early to declare victory in the inflation war and pointed out that the market's expectations for future interest rate cuts are unrealistic.
As a result, as of the time of writing, Australia's short-term financial market expectations for the number of future interest rate cuts have declined. The market expects that the probability of the board cutting interest rates to 3.85% in July is about 70%. In addition, the market's expectation that the policy rate will fall to 3.60% by the end of this year has fallen to about 50%. In the future, to judge whether the RBA will adjust its policy stance, it is necessary to focus on the following two aspects: (1) changes in the labor market, such as indicators such as the unemployment rate; and (2) the trend of domestic demand. (1) The reason why the RBA remains cautious about easing policy this time is largely based on the improved view of the labor market. Before the April Board of Governors meeting, the market will see the release of two employment data (on February 20 and March 20 respectively), and it is expected that the financial market will pay more attention to these data. (2) Australia's real GDP has maintained positive growth since the fourth quarter of 2021, but per capita GDP has declined for seven consecutive quarters until the third quarter of last year. This shows that there is still great uncertainty in Australia's economic outlook, and the recovery of household spending may be weaker than the RBA expects. On March 5, the real GDP data for the fourth quarter of last year will be released, and the performance of this indicator needs to be closely monitored.
■ Financial markets have reduced their expectations for the number of interest rate cuts, and in the short term, attention should be paid to the labor market and domestic demand trends
The Reserve Bank of Australia (RBA) held its first board meeting of the year from February 17 to 18 and decided to cut the policy rate (OCR) from 4.35% to 4.10%. Although this is the first rate cut since November 2020, the market's attention has shifted to the pace of future rate cuts as the financial market has digested this expectation. Overall, although the RBA has started a rate-cut cycle, the signal released by this meeting indicates that the pace of rate cuts will be slow.
The quarterly financial policy report (SMP) was also released at this meeting. Among them, the RBA lowered its expectations for real GDP growth before June 2025, but at the same time maintained the outlook for continued economic recovery and positive growth before June 2027. In addition, the RBA also lowered its unemployment rate forecast for June 2027, adjusting the peak unemployment rate from the previous 4.5% to 4.2%. Based on these adjustments to the forecasts for economic growth and the labor market, the RBA believes that there is no need to rush to cut interest rates at present.
This view was also directly reflected in the statement after the end of the board meeting and the speech of RBA Governor Bullock. The statement specifically added the following: "We remain cautious about the prospect of further policy easing." In addition, Governor Bullock said that it is too early to declare victory in the inflation war and pointed out that the market's expectations for future interest rate cuts are unrealistic.
As a result, as of the time of writing, Australia's short-term financial market expectations for the number of future interest rate cuts have declined. The market expects that the probability of the board cutting interest rates to 3.85% in July is about 70%. In addition, the market's expectation that the policy rate will fall to 3.60% by the end of this year has fallen to about 50%. In the future, to judge whether the RBA will adjust its policy stance, it is necessary to focus on the following two aspects: (1) changes in the labor market, such as indicators such as the unemployment rate; and (2) the trend of domestic demand. (1) The reason why the RBA remains cautious about easing policy this time is largely based on the improved view of the labor market. Before the April Board of Governors meeting, the market will see the release of two employment data (on February 20 and March 20 respectively), and it is expected that the financial market will pay more attention to these data. (2) Australia's real GDP has maintained positive growth since the fourth quarter of 2021, but per capita GDP has declined for seven consecutive quarters until the third quarter of last year. This shows that there is still great uncertainty in Australia's economic outlook, and the recovery of household spending may be weaker than the RBA expects. On March 5, the real GDP data for the fourth quarter of last year will be released, and the performance of this indicator needs to be closely monitored.