The Reserve Bank has signalled that it may move to ease interest rates again if inflation continues to soften.
In its quarterly statement on monetary policy released today, the RBA said the combined 0.5 percentage point cuts in the official cash rate in November and December were driven by the improved inflation outlook.
The central bank also defended its decision to leave the cash rate on hold at 4.25 per cent earlier this week, given that prior cuts largely had been passed on to borrowers and lending rates were close to average.
The RBA sees underlying inflation hovering at around 2.5 per cent, which would "provide scope for easing monetary policy should demand conditions weaken materially".
The central bank said it would adjust the cash rate "as necessary to foster sustainable growth and low inflation".
The RBA also confirmed that banks were facing higher costs to source money – the key reason why the banks are warning that they may not pass on future official rate cuts in full.