06:04 AM EST, 02/18/2025 (MT Newswires) -- The main macroeconomic event overnight Monday was the Reserve Bank of Australia's decision to lower rates after keeping them on hold since November 2023, said Mitsubishi UFG.

As widely expected, the RBA cut the policy rate by 25bps to 4.10%. The updated policy statement revealed that the RBA believes "some of the upside risk to inflation appear to have eased and there are signs that disinflation might be occurring a little more quickly than earlier expected."

The decision to "remove a little of the policy restrictiveness" was an acknowledgement that "progress has been made" but it's "cautious" about the outlook, wrote the bank in a note to clients. The RBA has stressed that it will be cautious in delivering further rate cuts which has helped to support the Australian dollar (AUD) overnight Monday, especially against the New Zealand dollar (NZD).

It has lifted AUD/NZD to an intra-day high overnight at 1.1141, pointed out MUFG. The pair has been in a narrow range between 1.1000 and 1.1100 for most of this year.

The RBA's caution in delivering further rate cuts continues to stand in contrast to the Reserve Bank of New Zealand which has already cut rates more aggressively by 125bps since its easing cycle started in August and is expected to deliver a third consecutive 50bps at its policy meeting overnight Tuesday, although it's possible that it could signal a slower pace of easing as its policy rate moves closer to estimates of the neutral rate, stated MUFG.

The RBA's caution over delivering further rate cuts reflects ongoing concerns that upside inflation risks remain, added the bank. The RBA expressed concern that "some labor market data have been unexpectedly strong" which suggests that the labor market maybe somewhat tighter than it had previously thought.

The RBA highlighted as well that its central forecast for underlying inflation has been "revised up a little" over 2026. Those updated forecasts suggested to the RBA that "if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the mid-point of the target range.

In the accompanying press conference, Governor Michele Bullock reinforced the relatively hawkish message by stating "I want to be very clear that today's decision does not imply that further rate cuts along the lines suggested by the markets are coming." The RBA needs to see more data and evidence that inflation is continuing to decline before making decisions about the future path of interest rates, and is "very alert" to upside risks that could derail disinflationary progress.

The comments have made the Australian rate market less confident that the RBA will deliver two further 25bps rate cuts by the end of this year, according to MUFG. The RBA's next rate cut is expected to be delivered by the July policy meeting.

Overall, the RBA's cautious message over the need for further easing is supportive for the Australian dollar which is already one of the top three performing G10 currencies so far this year, according to the bank. The AUF has outperformed recently alongside the strong rebound in commodity prices.