The Reserve Bank of Australia has lowered the official cash rate by 25 basis points to 3.85%, marking its second rate cut this year and taking interest rates below 4% for the first time since mid-2023. The move reflects growing confidence that inflation is under control, while also responding to heightened uncertainty from global trade tensions and deteriorating economic conditions abroad.
In a statement following its May board meeting, the RBA said inflation had “fallen substantially” from its 2022 peak, with recent data showing underlying inflation — its preferred measure — dipping to 2.9% in the March quarter. That places it within the RBA’s 2–3% target band for the first time in three years, providing scope to ease monetary policy.
“With inflation expected to remain around target, the Board therefore judged that an easing in monetary policy at this meeting was appropriate,” the statement read.
Second cut in 2025 amid shifting global dynamics
The decision comes after a prior 25 basis point reduction in February and a hold in April. It follows 13 consecutive hikes between May 2022 and November 2023, which had lifted the cash rate to 4.1%. The cumulative tightening severely impacted mortgage-holders and broader household spending.
The RBA’s recent pivot has been shaped in part by international developments — particularly the reintroduction of tariffs by US President Donald Trump under his “Liberation Day” trade agenda. Though some tariffs have been delayed, market volatility has surged, and the RBA warned that further escalation could trigger a global confidence shock.
“Uncertainty in the world economy has increased over the past three months,” the RBA noted. “Geopolitical uncertainties also remain pronounced. These developments are expected to have an adverse effect on global economic activity, particularly if households and firms delay expenditure pending greater clarity.”
The bank modelled a worst-case scenario in which a prolonged trade war would cost nearly 300,000 Australian jobs and shave around A$80bn from national output.
Impact on borrowers and banks
For mortgage holders, the 0.25 percentage point reduction means noticeable savings. Canstar estimates that a borrower with a A$750,000 loan will save around A$114 per month, or over A$2,500 annually when combining both 2025 cuts. NAB and other major lenders including CBA, Westpac and ANZ have already confirmed they will pass on the full rate reduction.
Finance experts also noted that lower rates increase borrowing capacity by about A$10,000 per 25 basis point cut, potentially encouraging more buyers into the housing market. However, affordability concerns and recent regulatory caution are likely to temper any runaway price growth.
Treasurer Jim Chalmers welcomed the decision, calling it “very welcome relief for millions of Australians,” but cautioned that “the job is not finished.”
“We’ve made real progress — inflation is easing, growth is recovering, unemployment remains low — but we’re operating in an uncertain global environment and need to remain vigilant,” Chalmers said.
Looking ahead: More cuts or pause?
Market reaction was subdued but pointed. The Australian dollar fell modestly to around 64.2 US cents following the announcement. Bond markets had largely priced in the move, with an 87% probability of a cut already baked in. However, stronger-than-expected April job numbers had slightly reduced expectations of a more aggressive cut.
Economists are split on whether more reductions will follow. AMP’s Shane Oliver sees the RBA revising down growth forecasts and expects further cuts this year. Independent economist Saul Eslake, however, warned against assuming a continued easing path: “One rate cut was almost certain, two is likely — but after that I’m not sure.”
The RBA reaffirmed its commitment to maintaining low and stable inflation, and left the door open to further cuts depending on incoming data and evolving global risks.
The next policy decision will come at the July board meeting, scheduled for 7–8 July.
