RBA delivers an interest rate cut. Just don't expect too many more

The Reserve Bank has finally delivered the rate cut many highly indebted mortgage borrowers have been crying out for.

The saying on financial markets is that rate cuts are like cockroaches: there is rarely just one.

But this time could be different.

At the same time as the RBA, quickly followed by the major banks, took the edge off home loan repayments, the central bank's board cautioned borrowers not to count on too much more rate relief.

"Upside risks remain," warned the board in its post-meeting statement.

That's also the key takeaway from the bank's detailed 58-page quarterly Statement on Monetary Policy (SMP) — do not bank on too many more rate cuts.

The RBA board felt it could cut rates because: "The output gap, which reflects economy-wide capacity pressures, continued to move closer to balance."

That's the economist's way of saying that high interest rates have held back your demand to buy goods and services enough that the economy's ability to supply them has almost caught up.

Almost, but not quite.

Follow live updates at the ABC News interest rates blog.

That means the Reserve Bank still thinks restrictive interest rates are needed to keep taking a bit more demand out of the economy, to keep a lid on price pressures.

They just don't need to be quite as restrictive.

After today's move, the cash rate sits at 4.1 per cent.

The bank's educated guesses of the neutral cash rate range from as low as around 1.5 per cent to nearly 4 per cent depending on which economic model and set of assumptions it uses.

It could be that today's cash rate cut and one more take interest rates back to neutral.

Most private-sector economists think it will take at least one or two more after that to get there, somewhere around 3.25-3.5 per cent.

RBA offers few hints on future rate cuts

In its post-meeting statement, the RBA board offered little clue as to when those cuts would come, or if they would come at all.

"The forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range," the board members warned.

"In removing a little of the policy restrictiveness in its decision today, the board acknowledges that progress has been made but is cautious about the outlook.

So, for mortgage borrowers, bad news on the economy is likely to be good news for their mortgage — unless they are the one who loses their job if unemployment climbs as forecast.

Relief for borrowers as RBA cuts interest rates

The Reserve Bank board cuts interest rates, decreasing the cash rate by 0.25 of a percentage point to 4.1 per cent.

The bank's updated economic forecasts in the SMP offer a further hint of where the cash rate might head (bearing in mind that even the RBA's senior officials acknowledge their forecasts are just that, and come with a great degree of uncertainty).

The two-quarter annualised rate of trimmed mean inflation was 2.7 per cent. Guess what the forecast core inflation rate is for the next two-and-a-half years? If you said 2.7 per cent, perhaps you should apply for a job in the RBA's economics department.

That inflation rate is within the 2-3 per cent target range but stuck just above the mid-point the RBA is aiming for.

However, that forecast comes from models that base their estimates on market pricing for the path of interest rates.

The market pricing the models used had three rate cuts this year and one next.

It makes you think, if the RBA delivers just one or two less than that, then it should be able to get inflation down to 2.5 per cent.

Read more on the RBA's February rate cut:

Trump smashes economists' crystal balls

But, just like the RBA's economists, I don't have a crystal ball.

And if any of us did before the inauguration of Donald Trump for a second term as US president, then he's well and truly smashed it for us within his first month back in office.

The RBA says it hasn't yet changed its forecasts to reflect the Trump administration's announcements on tariffs, except those already imposed on China.

How could it, given no-one knows for sure (possibly even Trump himself) exactly what he'll end up doing.

But one of the "key risks" to the RBA's outlook is a more aggressive approach by Trump on tariffs, disrupting global trade.

This would lower economic growth in Australia, albeit not necessarily by very much, and see the dollar fall and unemployment rise.

As for inflation, the RBA says it's even harder to read what might occur, as affected countries may look to redirect some exports to Australia, potentially lowering prices here even as inflation gets pumped up in the US.

The other key risks to the forecasts are local.

The RBA admits it might have overestimated the level of unemployment needed to get inflation to its target level of 2.5 per cent.

It thinks that rate has to be 4.5 per cent, up from the current level of 4 per cent, yet has core inflation within a hair of its target with unemployment at 4.2 per cent over the next couple of years.

Maybe that 0.3 per cent of the labour force doesn't need to be sacrificed on the sacred altar of the NAIRU for inflation to be tamed?

But the third key risk is productivity. Unless workers and, more especially, their bosses, lift their game through more investment in labour-saving technologies, then interest rates and unemployment may need to be higher and wages growth lower for inflation to remain under control.