The Reserve Bank of Australia is cautious about cutting interest rates, and the Australian dollar has risen to a more than two-month high

A senior Reserve Bank of Australia official said on Friday (February 21) that although the central bank has started to cut interest rates, it is cautious about further easing policy, stressing that all decisions will depend on the performance of economic data.jite foreign exchange platformReserve Bank of Australia President Brock pointed out that the strong performance of the labor market may delay inflation from falling, and the central bank will be patient and avoid premature or excessive interest rate cuts. Supported by factors such as hawkish remarks by officials, the Australian dollar held on to overnight gains against the US dollar on Thursday and briefly refreshed its high since December 12 to 0.6408.

Interest rate cut background and decision logic

The Reserve Bank of Australia announced on Tuesday that it would cut interest rates by 25 basis points to 4.1%, the first cut in more than four years. Block explained that the move was to avoid cutting rates too late, after the RBA had fallen behind other major central banks in easing policy. However, she stressed that the rate cut did not mean that the central bank would take further action immediately.

"We may lower rates further but we have to be careful," Mr. Block said. "We have no upfront commitment that everything will be data driven and people need to be patient."

The job market and inflationary pressures

The Reserve Bank of Australia warned that the strong performance of the labor market is the main obstacle to further interest rate cuts. The Australian economy has continued to create jobs over the past year, with the unemployment rate holding steady at around 4.0%. Although inflation has fallen from a peak of 7.8% at the end of 2022 to 2.4% in the fourth quarter of 2024, and annual wage growth has declined by one percentage point, the central bank believes the labor market remains tight, which could exacerbate cost pressures and prevent core inflation from falling back to the middle of its 2% -3% target range.

"If we are wrong and inflation falls faster, policy will need to respond," said Andrew Hauser, RBA vice-president. "But we would rather wait and see than prematurely assume this will happen."

Market expectations and policy outlook

The swap transactions showed investors' expectations for further rate cuts in the near term were low. The market sees a 17 per cent chance of a rate cut in April and a 70 per cent chance of a rate cut in May. For the full year, investors expect policy easing of just 40 basis points, equivalent to less than two 25 basis point rate cuts.

Mr. Hauser also pointed out that the consensus view that "there will be continued easing once interest rate cuts begin" was not always correct, stressing that the RBA's policy path would depend entirely on the performance of economic data.

Nomura economist Andrew Ticehurst said, "Future rate cuts are likely to be more about benign inflation readings allowing the RBA to remove constraints from policy settings, rather than macro weakness requiring easing."

"We maintain our view of a 25 basis point rate cut in May and August, and strategically we have a positive view on the Aussie dollar," Ticehurst said.

summary

The Reserve Bank of Australia has maintained a high degree of caution in cutting interest rates, emphasizing data-driven decision-making logic. Although inflation has fallen significantly, the strong performance of the labor market may delay further declines in inflation. The central bank will closely monitor economic data in the future and avoid premature or excessive easing to ensure a stable return of inflation to the target range. Market expectations for further rate cuts are more conservative, reflecting a complex assessment of the resilience of the Australian economy and inflationary pressures.

At 11:22 Beijing time, the Australian dollar was trading at 0.6403/04 against the US dollar.