RBA cuts cash rate for the first time since 2020

Homeowners with a mortgage will be breathing a collective sigh of relief following the Reserve Bank Board's decision to reduce interest rates for the first time in more than four years.

After the conclusion of its February monetary policy meeting this afternoon, the RBA Board announced that it had decided to reduce the official cash rate by 25 basis points to 4.10%.

It was the first cash rate cut since November 2020.

Leading up to the meeting speculation had been high that the RBA would lower rates given the better-than-expected figures that came out of the Australian Bureau of Statistics' latest quarterly Consumer Price Index release last month.

In its post-meeting statement, the Reserve Bank Board made reference to the encouraging inflation trend, but also noted that it would continue to pursue a cautious approach.

"In the December quarter underlying inflation was 3.2%, which suggests inflationary pressures are easing a little more quickly than expected. There has also been continued subdued growth in private demand and wage pressures have eased.

"These factors give the Board more confidence that inflation is moving sustainably towards the midpoint of the 2-3% target range.

"However, upside risks remain. Some recent labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat tighter than previously thought."

What will the cut mean for mortgages and savings?

After 13 cash rate hikes in 2022 and 2023 pushed home loan rates to their highest levels in a decade, it's fair to assume that many mortgaged households will welcome today's decision and the potential repayment relief it will bring.

While the impact will differ from customer to customer, an analysis by Compare the Market suggests that a typical borrower with a $642,000 loan paying a variable rate of 6.30% will see their repayments reduced by $104 each month if their rate is cut by 25bp.

Over the course of a year that same borrower would save roughly $1250 in repayments as a result of a 25bp rate reduction.

Of course, that assumes that all lenders will pass on the cut to their customers. David Koch, economic director at Compare the Market, warns borrowers that this isn't a given though.

"The fact of the matter is some banks may not pass on a rate cut right away, while some may not pass it on at all," he says.

"This is why Australians have to be on the ball, push to be moved onto better rates or move to a lender who is offering a better deal. Your loyalty could be costing you. It simply doesn't make sense to be paying a cent more than you need to."

Not all households will necessarily be celebrating today's decision either. If mortgage rates are lowered in the coming weeks, it's highly likely that banks will also begin reducing the interest rates available on their savings account and term deposit products.

Could there be more rate cuts on the way?

Unsurprisingly, the Board didn't give any indication as to its future course of action on rates in its post-meeting statement, beyond stressing that it would approach the prospect of further easing cautiously.

But if inflation continues to ease and other indicators align, is it possible that further cash rate reductions could be on the way? Economists at Australia's four major banks certainly believe so. At least, at present.

Economists at both the Commonwealth Bank and Westpac, for instance, have pencilled in four interest rate reductions over course of 2025, including today's cut.

Meanwhile, ANZ expects two rate cuts this year (including today's) and NAB has forecast that the Reserve Bank will reduce the cash rate to 3.10% by February 2026.

Only time will tell if these forecasts prove correct. In the meantime, the Reserve Bank Board will come together again in six weeks when it holds its next monetary policy meeting on March 31 and April 1.

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