The Reserve Bank Board has announced a decision to lower the cash rate target to 4.10 percent and the interest rate on Exchange Settlement balances to 4 percent. This move comes as underlying inflation shows signs of moderation, with inflation falling significantly since its peak in 2022.
“Underlying inflation is moderating,” stated the Board, noting that higher interest rates have helped bring aggregate demand and supply closer to balance. The December quarter saw underlying inflation at 3.2 percent, indicating that inflationary pressures are easing more quickly than anticipated.
Despite this progress, the Board remains cautious due to potential upside risks. Recent labor market data suggest tighter conditions than previously thought, leading to a slight upward revision of the central forecast for underlying inflation over 2026. “While today’s policy decision recognizes the welcome progress on inflation, the Board remains cautious on prospects for further policy easing.”
The economic outlook remains uncertain with weak growth in output and slower-than-expected recovery in private domestic demand. Wage pressures have eased more than expected, housing cost inflation is abating, but labor market conditions remain tight.
“There are notable uncertainties about the outlook for domestic economic activity and inflation,” noted the Board. The central projection anticipates an increase in household consumption as income growth rises, though there is a risk that consumption may pick up slower than expected.
Uncertainty also persists regarding international economic conditions due to geopolitical and policy factors which could impact global activity if expenditures are delayed by households and firms awaiting clearer outlooks.
“Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority,” emphasized the statement. While acknowledging some progress with disinflation occurring faster than expected, risks remain on both sides.
The Board will continue monitoring data closely and assessing risks to guide future decisions while focusing on developments in global economy trends, domestic demand, and labor market conditions.
