The Reserve Bank of Australia (RBA) has lowered the official cash rate by 25 basis points to 3.85% on May 20, 2025, a move which was expected by most of the forecasting industry.
Why the RBA Cut the Interest Rate in May 2025
This decision comes as inflation has returned to the RBA’s 2–3% target band, with the latest ABS data showing annual inflation at 2.4% as of March 2025. Key takeaways from the RBA’s May 2025 announcement were:
- The increase in global uncertainty causes a weaker outlook for the Australian economy
- The unemployment rate is expected to increase this year
- Inflation is forecast to settle in and stay in the target range
Australia’s inflation has been trending lower from a peak at 7.8% in December 2022 to its current 2.4%. The drivers of a lower inflation rate are easing supply chain pressures, stabilising energy prices, and a slowdown in the growth of housing rent and food prices.
The unemployment rate sits at 4.1%, below the 10-year average of 5.0%, reflecting ongoing tightness in the labour market.
GDP growth is currently tracking at 1.3% year-on-year, and while this growth rate falls below the nation’s long-term average, Australia track’s equal to, or better than, the GDP growth of other developed countries (example, GDP growth in the EU region was also 1.3%, and in the USA it was negative 0.2%).
The property market has demonstrated remarkable resilience throughout this period of high inflation and high interest rates. According to CoreLogic, combined capital cities house values rose 2.9% year-on-year in April 2025, while annual growth in combined regional markets reached 5.3%.
Rental markets remain extremely tight, with national vacancy rates at just 1.3%, and weekly rents increasing by compound annual growth rates of 7.5% for houses and 8.8% for units over the past three years.
What a Rate Cut Means for Property Purchasers
The rate cut has several important implications for property owners and investors:
Lower Borrowing Costs: The immediate effect is lower mortgage repayments. For a typical $600,000 loan, a 0.25% reduction could save borrowers approximately $80 per month. However, it should be noted that lenders don’t always pass on the full rate cut.
Upward Pressure on Property Prices: A lower interest rate increases loan serviceability and can increase the borrowing power and budgets of buyers, especially among first-home buyers and upgraders. This is a demand side driver and thus will put upwards pressure on the housing market, particularly in affordable markets such as regional areas.
Regional markets, particularly in Western Australia, Queensland, and South Australia, continue to outperform the capital cities with Regional WA growing at 13.9%, Regional QLD at 14.0%, and Regional SA at 14.7%.
Higher Investor Demand: The value of new investor lending has already been on an upward trend. increasing by 27% year-on-year. Further rate cuts are expected to further improve investor sentiment through higher borrowing limits and an improved cashflow equation.
Industry Forecasts for Interest Rates for the Rest of 2025
Looking ahead, financial markets are pricing in additional rate cuts before the end of 2025. Current market pricing indicates approximately a 50% chance of another cut as early as July, with a full 0.25% reduction priced in by August.
The major banks have varying views on where rates will settle by year-end. CBA, Westpac, and ANZ forecast that the cash rate will reach 3.35% by the end of 2025, while NAB expects a lower endpoint of 3.10%.
What’s particularly notable is the RBA’s increasingly “dovish” tone—meaning they’re more open to further rate reductions.
Governor Bullock has indicated the Board is prepared to “move quickly” if economic conditions require it, especially given ongoing global economic uncertainties.
