RBA cuts cash rate again - data hints at more easing

In a move that was widely expected, the Reserve Bank of Australia has cut the nation’s official cash rate by 0.25% to 3.85%.

It’s the second rate cut delivered by the RBA in three months.

The move, which will be warmly welcomed by Australians with a mortgage, will see households with a $750,000 home loan save around $114 a month less in repayments - if banks and financial institutions pass on the rate cut in full.

Moments after the decision was announced, one of Australia’s “big 4” banks - NAB - announced it was passing on the cut in full to variable rate mortgage holders. 

Updated RBA economic forecasts, released at the same time as the decision was announced, show the central bank now believes core inflation is under control, suggesting more interest rate cuts are likely.

The details

The RBA’s monetary policy board has cut interest rates by 25 basis points at its May 2025 meeting, taking the cash rate from 4.1% to 3.85%. 

It’s the second cut in this current interest rate cycle, following on from a 25 basis point cut in February.

Cherelle Murphy, the Chief Economist at EY Oceania, says the move was no surprise and entirely justified.

“Remember that at 4.1%, the interest rate is actually restricting the economy,” she says.

“We've got certain parts (of the economy) that are quite soft, so (consumer) consumption, for example.

“We will see from this, I guess, a little bit of an easing up in conditions for households.

“Of course, on the horizon, potentially there are more risks given what's going on in the global trade environment,” she says.

“So I think when you put those two things together, plus the fact, of course, that inflation has come back down into the target band, both on headline and underlying terms, it certainly does justify this move from the Reserve Bank.” 

In a media release accompanying the decision, the RBA made clear it is worried about the uncertain international environment and the knock-on effects of the trade and tariff chaos unleashed by US President Donald Trump.

The media release also referred to updated inflation forecasts contained in the RBA’s latest Statement on Monetary Policy:

“Staff forecasts released today project that while headline inflation is likely to rise over the coming year to around the top of the band as temporary factors unwind, underlying inflation is now expected to be around the midpoint of the 2–3% range throughout much of the forecast period.”

The Reserve Bank is mandated to use the only real tool at its disposal - interest rates - to keep inflation in the 2 to 3% range.

At a press conference after the decision was announced, RBA Governor Michele Bullock said the fact that inflation had returned to target was “very good news.”

“The board's strategy over quite some time has been to bring inflation down while avoiding a sharp rise in unemployment,” she said.

“This is consistent with our dual mandate of price stability and full employment.” 

She also revealed there had been “consensus” by the monetary policy committee for what she described as a “confident cut”, despite the uncertain international outlook.

The rate cut was warmly welcomed by the Federal Treasurer Jim Chalmers. 

“When it comes to inflation, both headline inflation and underlying inflation are now in the Reserve Bank's target band for the first time in almost four years.

“This is the first time since records began that we've got the unemployment rate in the low fours at the same time as we've got both measures of inflation (headline and core) in the target band at the same time,” he told a press conference in Canberra.

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Implications for housing

REA Group Senior Economist Eleanor Creagh says buyer confidence and borrowing capacities for potential homebuyers will be lifted as interest rates fall. 

“The rate cut offers some relief for borrowers, but affordability remains a challenge and sustained affordability improvements will depend on further reductions in the cash rate over time.

“At the same time, population growth and a persistent undersupply of new housing continue to underpin prices.

“Despite affordability constraints, we expect prices will keep lifting over the coming months, but the rate of growth is likely to be more modest compared to recent years,” Ms Creagh says.

Tim Lawless, Research Director at Cotality, formerly CoreLogic, has a similar assessment.

“Historically, rate cuts have tended to boost sentiment,” he says.

“We may also see continued upward pressure on housing prices, extending the broad-based recovery in values that began after the February rate cut.

“That said, we don’t expect a significant acceleration in capital gains,” he says.

Future cuts? 

The money markets currently have fully priced in two more 25 basis point interest rate cuts by the end of the year, which would take the cash rate down to 3.35%.

While ANZ Head of Australian Economics Adam Boyton says the RBA’s language was more “dovish than we - and, it would seem, the market expected” he’s sticking by the bank’s prediction of just one more cut this year and one in the first three months of 2026.

EY’s Cherelle Murphy is a little more optimistic.

“I think the Reserve Bank potentially has another two (cuts) in it this year.

“But again, it depends, of course, on how things eventuate.”

“As we've seen over the last three months with the Trump administration, that is very hard to predict…..”

Ain’t that the truth!