Australia’s central bank said on Wednesday that monetary policy was restrictive with the current cash rate causing financial pain for many households, but it could not rule out further tightening if necessary to tame inflation.
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Australia’s central bank cut its benchmark lending rates by 25 basis points on Tuesday, while downgrading the annual economic outlook for the country.
The Reserve Bank of Australia reduced its economic growth forecast for the year to 1.7% from 2.1%, saying that a weaker-than-expected rise in public demand in early 2025 was unlikely to be offset through the rest of the year.
The country’s benchmark rates are now at 3.6%, the lowest since April 2023, and in line with expectations of economists polled by Reuters.
The RBA said that inflation had dropped “substantially” since the peak in 2022, with steeper interest rates bringing aggregate demand and potential supply “closer towards balance.”
Australia’s S&P/ASX 200 equity index was up about 0.3% after the decision, while the Australian dollar weakened 0.15% to trade at 0.6501 against the greenback.
Inflation in Australia came in at 2.1% in the second quarter, its lowest since March 2021 and near the lower end of the RBA’s 2%-3% range.
Tuesday’s rate cut comes amid a drastically reshaped trade environment as U.S. tariffs have come into effect, as well as a less-than-expected economic growth in the first quarter.
Australia was hit with the baseline 10% tariff by U.S. President Donald Trump, which the country’s trade minister reportedly hailed as a “vindication” for the government’s negotiations.
The RBA said that the risk of a “very damaging” trade war has diminished, and “recent international trade policy developments have had little discernible impact on the Australian economy to date.” However, it warned that a more material disruption to global trade cannot be ruled out.
The lower GDP growth forecast is owed more to a lower outlook for productivity growth, instead of trade disruptions, the central bank said.
The country’s economy grew 1.3% year on year in the first quarter, lower than the estimated 1.5% growth in a Reuters poll. On a quarter-on-quarter basis, the economy expanded 0.2%, undershooting expectations for a 0.4% growth.
Katherine Keenan, ABS head of national accounts, attributed the soft growth to shrinking public spending and weakened consumer demand and exports.
Analysts at the Commonwealth Bank of Australia forecast another rate cut in November, and see the possibility of one more in “early 2026.”
Marcel Thieliant, head of Asia-Pacific at Capital Economics, expects rates to decline to 2.85% by the middle of 2026, based on the RBA’s reduced inflation forecast.