The Reserve Bank of Australia is cautious about cutting interest rates too quickly: whether inflation slows down determines its attitude

The Reserve Bank of Australia's decision to cut interest rates for the third time in four meetings is not in line with its cautious and gradual easing strategy, which shocked the market as the central bank chose to keep interest rates unchanged for the month.

At the previous policy meeting, the majority of the nine member board of directors of the Reserve Bank of Australia believed that the 3.85% interest rate was still moderately restrictive, but it was also difficult to say how much further to lower the neutral level would be considered correct. The three supporters of the interest rate cut argue that there is ample evidence to suggest that inflation has the potential to continue returning to near target levels, so there is no need to wait and policy adjustments need to continue. The Reserve Bank of Australia unexpectedly kept interest rates unchanged at the meeting. In a rare 6-3 vote, most members believed that more information, including quarterly price data, should be awaited to confirm the trend of inflation slowing down.

The Reserve Bank of Australia stated that in order to respect market pricing, there have been instances where the market had extreme confidence in the outcome of policy meetings and the central bank took different actions. The data shows that the indicators are the same as predicted, even exceeding expectations. Now it seems that waiting longer is better. It pointed out that in the weak situation of relatively soft economic growth in the first quarter, private demand rebounded more than expected, and the labor market was not as loose as expected. At the same time, monthly inflation will also fluctuate unpredictably, and the composition of housing and other factors indicates that inflation in the June quarter will be stronger than expected. The market currently predicts that the probability of the Reserve Bank of Australia cutting interest rates again at its next meeting on August 12th is nearly 91%.

Currently, although inflation in Australia is low, it is still at a high level and there is an upward risk of inflation. A too fast interest rate cut may release too much liquidity to stimulate demand expansion and push up prices, which is not conducive to achieving the inflation control target of the Reserve Bank of Australia.

Secondly, under the pressure of the labor market, wages have increased. The increase in wage pressure and rising costs bring upward pressure to inflation, leading the Reserve Bank of Australia to comprehensively analyze labor market data in its interest rate cut decisions to prevent inflation overshoot caused by its own interest rate cut policies. In addition, economic growth, consumer spending, government economic policies, and overseas economic conditions will all affect the Reserve Bank of Australia's interest rate cut policy. The Reserve Bank of Australia ensures that the interest rate cut policy can maintain economic growth without the potential risk of inflation overshoot in financial stability policies.

This indicates that the Reserve Bank of Australia has adopted a cautious approach to lowering interest rates by grasping the characteristics of the economic cycle and adapting to it. In the downward phase of the economic cycle, using interest rate cuts is one of the important means to drive economic growth. However, the action of cutting interest rates too fast and too fast will lead to market information disorder, make social resources mismatched, and then lead to excessive investment, which will lead to overcapacity, asset foam and other new situations in the economic upward phase.

In order to avoid this situation, the Reserve Bank of Australia is more willing to use a gradual interest rate cut policy, which not only effectively ensures the stable and sustained effect of monetary policy on the economy, but also helps the Reserve Bank of Australia to have greater policy space in the subsequent economic cycle.

In summary, the Reserve Bank of Australia believes that interest rate cuts should not be overly aggressive, mainly due to its reasonable judgment of the economic cycle, the use of prudent interest rate cutting methods, and the effective interaction between monetary policy and the market, in order to ensure the prudence of the Reserve Bank's policies and lay the foundation for Australia's long-term economic prosperity.