Australia has been one of the few countries to maintain interest rates at post-pandemic levels, aiming to curb inflation over the long run despite keeping the cost of living high.

However, the Reserve Bank of Australia (RBA) announced a 0.25% rate cut on Tuesday, signaling confidence in the economy’s resilience and its ability to handle lower costs.

"Inflation has continued to ease, and underlying inflation is now expected to return to the 2–3% range slightly earlier than previously anticipated," the RBA stated. "The labour market has also shown unexpected strength."

During its February meeting, the central bank decided to lower the cash rate target to 4.10%, acknowledging progress in managing inflation while maintaining a cautious stance. A key reason for this caution is the unpredictability of global economic conditions.

"The global outlook remains uncertain due to evolving trade policies and geopolitical tensions," the statement noted. The US has recently imposed tariffs on Mexico, Canada, and key commodities like steel and aluminum. Additionally, fresh US data indicates that inflation has picked up again following the Federal Reserve’s rate cuts.

According to Sek, the RBA remains primarily focused on domestic inflation trends, employment figures, and consumer sentiment when making policy decisions.

Following the RBA's announcement, the Australian Dollar gained strength, with the AUD/USD pair rising 0.05% on the day to reach 0.6360 as of yesterday.

How the RBA Rate Cut Affects the AUD

Lower interest rates generally reduce the appeal of a currency, as they lead to lower returns on investments. However, the RBA's decision appears to have reassured markets about economic stability, giving the Australian Dollar a slight boost. Traders will now be watching how the central bank navigates inflation and employment trends in the coming months.