Australia’s central bank on Tuesday reduced its benchmark interest rate for the first time since October 2020 as the nation’s inflation cools.

The Reserve Bank of Australia reduced the cash rate by a quarter percentage point from 4.35 per cent to 4.1 per cent at its first board meeting for the year.

The cut was widely anticipated after inflation rose only 0.2 per cent in the December quarter and 2.4 per cent for calendar 2024. Annual inflation peaked at 7.8 per cent two years earlier.

The bank manipulates interest rates to keep inflation within a target band of between 2 per cent and 3 per cent.

“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance,” the board said in a statement.

Bank Governor Michele Bullock later advised against believing economic forecasts that several more rate cuts were expected this year. The board will next consider changing interest rates at its meeting on April 1.

“Some other central banks have cut interest rates quite sharply over the past year, but we have taken a different strategy to most,” Bullock told reporters.

“Our policy rate was not raised as much as many countries overseas. We judged that while inflation expectations remained anchored, we could take a bit longer to bring inflation back to the target band, but we could keep unemployment lower,” she added.

Unemployment in Australia remained at near-record low levels of 4 per cent in December, up from 3.9 per cent in November.

Bullock said US plans to increase tariffs on trading partners had the potential to be bad for economic activity around the world.

“The tariff threats and what’s going on overseas is very uncertain and probably even worse, it’s unpredictable,” Bullock said.

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The rate shift is a welcome development for Prime Minister Anthony Albanese’s center-left Labor Party government which will seek reelection at elections due by May 17.

Treasurer Jim Chalmers welcomed the independent board's decision.

“This is the rate relief Australians need and deserve,” Chalmers said in a statement. “It won't solve every problem in our economy or in household budgets but it will help."

Chalmers said his government had curbed inflation without the negative consequences experienced in other countries including of high unemployment, a shrinking economy and recession.

Twelve of the last 13 rate increases have taken place since the government was elected for its first three-year term on May 21, 2022.

The cycle began in the final days of the previous government’s tenure when the rate rose from a record low 0.1 per cent to 0.35 per cent on May 4, 2022.

The high cost of living and a shortage of housing around Australia are expected to be major issues in the upcoming election campaign.

The central bank had held the cash rate at 4.35 per cent since November 2023. That was the highest rate since it fell from 4.5 per cent to 4.25 per cent in December 2011.