RBA delivers 0.25 percentage point cut to cash rate in second interest rate reduction - 20 May 2025
The Reserve Bank of Australia has cut interest rates, taking the cash rate below 4 per cent for the first time in two years.
At its May meeting, the RBA's monetary policy board decided to decrease the cash rate by 0.25 of a percentage point, to 3.85 per cent.
Following the decision, the Australian dollar dropped from around 64.5 US cents to 64.2 US cents, as expectations of further interest rate cuts rose.
"With inflation expected to remain around target, the board therefore judged that an easing in monetary policy at this meeting was appropriate," the RBA board said in its statement.
"The board considered a severe downside scenario and noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia."
It is the second cut to rates this year, providing some further relief to home loan borrowers after 13 rate hikes between May 2022 and November 2023, when the cash rate was left on hold until a cut in February this year.
Why did the Reserve Bank cut interest rates?
After the February board meeting, US President Donald Trump's "Liberation Day" tariff announcement ignited global trade disputes and rocked financial markets, leading some to forecast even deeper rate cuts, although the ensuing tariff delays saw expectations pared back.
In its post-meeting statement, the board acknowledged that inflation has fallen substantially from its peak, while the outlook remains uncertain.
"Uncertainty in the world economy has increased over the past three months and volatility in financial markets rose sharply for a time," the statement read.
RBA confident inflation tamed
"While recent announcements on tariffs have resulted in a rebound in financial market prices, there is still considerable uncertainty about the final scope of the tariffs and policy responses in other countries. 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 on the outlook.
"This has also contributed to a weaker outlook for growth, employment and inflation in Australia.
"That said, world trade policy is changing rapidly, thereby making the central forecasts subject to considerable uncertainty."
The RBA's official cash rate was last below 4 per cent in May 2023, before it was raised to 4.1 per cent at the June 2023 meeting.
Inflation data for the March quarter was a key source of the RBA's confidence.
"At 2.9 per cent, annual trimmed mean inflation was below 3 per cent for the first time since 2021 and headline inflation, at 2.4 per cent, remained within the target band of 2–3 per cent," the statement noted.
Updated forecasts released in the central bank's quarterly Statement on Monetary Policy show "underlying inflation is now expected to be around the midpoint of the 2–3 per cent range throughout much of the forecast period".
Will there be further rate cuts?
Market pricing for further interest rate cuts increased after the May decision, with about a 50 per cent chance of another quarter of a percentage point reduction at the next meeting in July, according to LSEG data.
Betashares chief economist David Bassanese has forecast two more interest rate cuts this year, to take the cash rate to 3.35 per cent.
"With underlying inflation expected to fall to the mid-point of the target band, there remains a strong case for the RBA to continue to process of 'normalising' interest rates [by] reducing them from still restrictive levels," he wrote.
"If inflation falls to normal levels, so should interest rates."
While Mr Bassanese noted the potential for further cuts if the global tariff uncertainty hits global and local economic growth more than anticipated, but said it was not his base case.
"The openness of the Trump Administration to lower tariffs in exchange for trade deals has been a major development in recent weeks, and should be enough to avoid the US tumbling into a serious recession.
"But if the US does fall into recession, the RBA could easily cut rates into expansionary territory — as far as 2 per cent or even lower."
CreditorWatch chief economist Ivan Colhoun described it as "a more dovish easing" by the central bank.
"The accompanying forecasts and commentary reflect greater anticipated negative effects of US tariff policy and related uncertainties than I had expected … there remains significant uncertainty around the final scope of US tariff policy," he said.
"It's not unreasonable to expect two to three more interest rate cuts this year."
Mr Colhoun noted that the RBA's updated forecasts, which has incorporated the anticipated negative effect of tariffs, assume two further cuts to the cash rate.
"Tariff effects have seen the RBA trim its forecast recovery in GDP growth, raise its unemployment forecast very slightly, and reduce its inflation forecasts to a broadly at target 2.6 per cent throughout the forecast horizon."
What will the interest rate cut mean for borrowers?
Lenders were quick to announce they would pass on the interest rate reduction to home loan customers, with major banks NAB, Commonwealth Bank, ANZ and Westpac all announcing cuts to variable mortgage rates, which will come into effect in coming weeks.
Financial comparison site Canstar estimated that on a $1 million loan, minimum monthly repayments would reduce $114 to $6,328.
On a $500,000 mortgage, repayments would drop $76 to $3,164.
The estimates were based on an owner-occupier making principal and interest repayments, with 25 years left on the loan as of this month, on an average variable rate for existing borrowers of 6.06 per cent (prior to the 0.25 percentage point cut).
"I know this period of relatively high interest rates has been, and continues to be challenging for many households and businesses, but it was essential we brought inflation down because inflation hurts everyone," Ms Bullock said.
"The strategy that we took to achieve this was different to that of some other central banks, who took rates much higher than we did.
"The board accepted the trade off that, leaving the cash rate where it was would bring inflation down more gradually, but without a big increase in unemployment, a sharp rise in unemployment would have been very costly for families and for the Australian economy."
Source: www.abc.net.au