The Reserve Bank of Australia (RBA) is poised to reduce the official interest rate below 4% for the first time in over two years, as financial markets anticipate a cut of 0.25 percentage points to 3.85%.

This anticipated reduction comes during the RBA's monetary policy board meeting scheduled for Monday.

Previously, interest rates had not been below 4% since May 2023, when headline inflation stood at 7% and underlying inflation was recorded at above 6%.

By comparison, the latest figures show headline inflation has decreased to 2.4%, and underlying inflation is at 2.9%.

A quarter percentage point reduction would result in a decrease of approximately $100 in monthly repayments for a $600,000 mortgage, following a similar reduction implemented in February, which also lowered repayments by $100 for the same loan amount.

Gareth Aird, head of Australian economics at the Commonwealth Bank, noted that despite a tight jobs market, the RBA appears to have successfully reduced inflation levels, warranting a reassessment of interest rates.

He described the situation as a potential achievement of a ‘soft landing’, leading to further normalisation of the cash rate in the coming years.

The RBA's aggressive strategy to curtail inflation has been substantiated by recent figures indicating that Australian home buyers paid a record $20 billion in interest on their mortgages in the March quarter alone.

Over the 12 months leading up to March, the total interest paid approached $80 billion, marking a significant 159% increase compared to the year preceding the RBA's initial rate rise in May 2022.

When factoring in investor mortgages, total interest payments by Australian borrowers since the beginning of the rate hikes in 2022 have reached nearly $290 billion, juxtaposed with $157.5 billion paid over the three years prior.

If the cash rate is reduced to 3.85%, it will still be deemed restrictive, suggesting that further cuts could be anticipated later this year and into 2026. Recent data indicating an unemployment rate steady at 4.1%, despite a notable increase in job creation during April, alongside wage growth at 3.4%, aligns closely with the RBA's economic forecasts, which are set for revision on Tuesday.

Paula Gadsby, a senior economist, remarked that the recent economic indicators might bolster the RBA's confidence in proceeding with rate cuts in the near term, specifically at the upcoming board meeting.

She noted the potential for additional rate cuts by the year's end, influenced by ongoing global trade uncertainties and their potential impact on consumer and business investment.

A significant aspect affecting monetary policy has been the broader implications of global trade tensions, particularly those instigated by previous U.S. tariffs.

Although financial market volatility has receded following a de-escalation of trade tensions between the United States and China, concerns persist as the U.S. faces its highest effective average tariff rates in 80 years.

Economists at ANZ project that a quarter point rate cut is likely, predicting subsequent cuts later in the year.

They anticipate that while the conditions for another immediate cut in July seem less favorable, easing in May represents the least risky path for the RBA amidst current uncertainties in the global context.