Treasurer Jim Chalmers says Tuesday’s interest rate cut will give Australians hope that “the worst of the inflation challenge is behind us”.

The Reserve Bank of Australia delivered long-awaited financial relief to mortgage holders, cutting interest rates for the first time in more than four years.

The widely-expected move to lower the official cash rate target by 25 basis points to 4.1 per cent was immediately followed by banks vowing to pass the decrease on in full.

The cut marks the start of a much-anticipated monetary easing cycle following 13 rate rises since May 2022, which left interest rates at their highest level in 15 years.

Chalmers said the cut — which equates to $77 a month on a $500,000 mortgage — was the “soft landing that we’ve been planning for and preparing for”.

“But we cannot be complacent about the months and years ahead. We know that there’s more work to do,” he said.

“We know that this is not the solution to every challenge that people are confronting in their household budgets, but it will help, it is a welcome step when it comes to providing a bit of relief for Australians doing it tough.”

Chalmers said inflation was currently almost one-third of the 6.1 per cent Labor inherited from the former Morrison government.

“But it’s not mission accomplished because we know that people are still under pressure, and that’s why the primary focus of this Albanese Labor government will continue to be the cost of living.”

RBA governor Michele Bullock said the decision to drop rates had been “very difficult”.

“It was a difficult decision in the sense there’s argument on both sides,” she said.

“The board had an active debate on the arguments on both sides on this.

“But in the end, came to the view the better decision was to ease a little bit of the restrictiveness, still maintain some restrictiveness, but ease a little bit of restrictiveness in recognition we’re making progress towards our goal.

“I understand many households will be relieved by this. But the important point I made before is that it’s really important we beat inflation. Because that hurts absolutely everyone.”

Bullock could not say if the rate cut would be the only one mortgage holders could expect.

But she warned that predictions of a string of upcoming rate cuts may be overly optimistic.

“The market is expecting quite a few more interest rate cuts to the middle of next year, about three more on top of this,” she said.

“Whether or not that eventuates will tend very much on the data.

“Our feeling at the moment is that’s far too confident.

“I can’t say ‘one and done’,” she said of the first rate cut after 13 rate increases.

“We have done one (rate cut), we have removed a bit of restrictiveness, we’re still restrictive, and we’re waiting for more evidence we’re getting inflation sustainably back in the band before we’re willing to move again.”

Shadow treasurer Angus Taylor said the rate relief had been “a long time coming” for suffering Australians.

“We’ve seen interest rate cuts elsewhere in the world,” he said.

“Australia has been at the back of the pack in bringing core inflation down and in that time.

Taylor said a typical Australian household with a mortgage had paid an extra $50,000 in interest rate costs.

“It is long-suffering Australian households who are welcoming this today, no question about that.”

In its post-meeting statement, the board struck a hawkish tone, which will bolster economists’ expectations of a shallow easing cycle.

“Some recent labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat tighter than previously thought,” it said.

“While today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing.”

The rates market had priced in a 90 per cent chance of a cut ahead of the meeting, following a softer-than-expected underlying inflation print for the December quarter.

But economists were less certain. Of the 32 economists polled by AAP, 22 per cent expected a hold.

Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, expected the bank to tread lightly from here on, delivering only two more cuts in 2025.

“This is an unusual economic environment for the RBA to be cutting rates in,” he said.

“The labour market is beyond capacity, services inflation is running above 4 per cent, and momentum in consumer spending is improving.

“But the weaker-than-expected Q4 CPI print was enough to outweigh these factors and spur the RBA to cut.”

Mortgage holders have been struggling to keep up with high interest rates, with mortgage arrears rising steadily from the record low of one per cent in mid-2022.

If lenders pass the cut on in full, borrowers with an average home loan of $641,416 can expect to save over $100 per month, according to financial comparison site Finder.

The big four banks – Westpac, ANZ, NAB and the Commonwealth Bank immediately announced they would be passing on the rate cuts in full to variable rate home loans, effective February 28.

The RBA in its Statement on Monetary Policy, released alongside its rate decision, said it had underestimated how tight the jobs market would be.

As a result, it expected underlying inflation to remain above the midpoint of its two to three per cent target range for longer than expected.

-with AAP