The Reserve Bank of Australia (RBA) has lowered the cash rate to 3.85%, marking the second rate cut this year and bringing it below 4% for the first time since 2023.
At its May meeting, the RBA board reduced the rate by 0.25 percentage points, citing contained inflation and growing global economic uncertainty. In response, the Australian dollar dipped slightly, falling from around 64.5 to 64.2 US cents, as markets priced in the likelihood of further cuts.
“With inflation expected to remain within target, the board judged that a rate reduction was appropriate,” the RBA stated, noting that monetary policy remains flexible enough to respond to future international developments that could impact Australia’s economy.
Rate Cuts Offer Relief After Tight Cycle
This latest reduction follows a lengthy tightening cycle that saw 13 consecutive rate hikes between May 2022 and November 2023. After holding rates steady for several months, the RBA began easing again with a February cut.
The board pointed to a sharp decline in inflation and growing volatility in global markets. They warned of slower global growth if households and businesses delay spending due to ongoing tariff and geopolitical uncertainty.
Despite some recovery in financial markets after delays in the US tariff rollout, the RBA emphasized that uncertainty remains elevated and is affecting Australia’s outlook for growth, employment, and inflation.
RBA Confident Inflation is Under Control
According to RBA Governor Michele Bullock, inflation now appears to be under control. “We’ve become a little more confident that things are heading in the right direction, so we’re easing off slightly,” she said.
Recent data shows that trimmed mean inflation dropped to 2.9% in the March quarter — the first time since 2021 it has fallen below 3%. Headline inflation also stayed within the RBA’s 2–3% target, at 2.4%.
Forecasts in the RBA’s latest Statement on Monetary Policy project that underlying inflation will remain close to the midpoint of the target range through most of the forecast period.
More Cuts Likely This Year
Markets are now pricing in a roughly 50% chance of another rate cut in July, according to LSEG data. Betashares chief economist David Bassanese predicts two more cuts this year, which would bring the cash rate down to 3.35%.
He argued that if inflation stays within target, interest rates should be lowered accordingly, calling the move part of a “normalisation” process.
However, he added that if trade tensions escalate or the global economy slows significantly, the RBA may be forced to cut further — potentially to 2% or below — though this is not his main scenario.
CreditorWatch chief economist Ivan Colhoun also expects two to three more cuts this year, citing the RBA’s more cautious stance due to global uncertainty, particularly around U.S. tariff policies.
The RBA’s new projections account for the anticipated impact of tariffs, showing slightly slower GDP growth, a modest uptick in expected unemployment, and inflation settling at around 2.6%.
What This Means for Borrowers
Major banks including NAB, Commonwealth Bank, ANZ and Westpac have already confirmed they will pass on the rate cut to variable mortgage holders in the coming weeks.
According to financial comparison site Canstar:
- A $1 million loan could see monthly repayments fall by $114 to $6,328.
- A $500,000 loan could see a $76 drop in repayments, bringing them down to $3,164.
These estimates are based on average variable rates prior to the cut, and assume 25 years remaining on the loan with principal and interest repayments.
Governor Bullock acknowledged the strain high interest rates have placed on households but said decisive action on inflation was necessary.
“While other central banks raised rates more aggressively, we opted for a slower approach to reduce inflation without causing a spike in unemployment,” she explained. “Sharp job losses would have been far more damaging for families and the broader economy.”
