Cash Rate Decision May 2025: RBA Lowers Cash Rate to 3.85%
20 May, 2025
Updated: 20 May, 2025
The Reserve Bank of Australia (RBA) has reduced its cash rate target by 25 basis points to 3.85% during its May 2025 meeting.
Why Did The RBA Lower The Cash Rate In May 2025?
The RBA’s decision follows signs that inflation is easing and the economic outlook is softening. Annual trimmed mean inflation has fallen to 2.9%, back within the central bank’s 2-3% target band, for the first time since 2021. Headline inflation sits even lower, at 2.4%.
The RBA stated that, “The risks to inflation have become more balanced [and] inflation is in the target band and upside risks appear to have diminished.”
While domestic conditions such as real household income growth and easing financial stress were acknowledged, the RBA highlighted that international uncertainties, including tariff changes and geopolitical tensions, are likely to weigh on global and local economic activity.
The Reserve Board stated, “With inflation expected to remain around target, the Board, therefore, judged that an easing in monetary policy at this meeting was appropriate.”
Still, the RBA remains cautious. It warned of “considerable uncertainty” around both inflation and growth forecasts and reiterated that it is prepared to respond if global developments deteriorate further.
What Do Our Experts Say About The RBA’s Decision?
Otto Dargan, CEO of Home Loan Experts, says this move has been a long time coming, calling it “the cut we’ve been waiting for” and noting that “it’s clear the RBA is pivoting toward growth and responding to what the money market’s been saying for months”.
Looking ahead, he highlights the potential impact of upcoming government policy, stating that, “In January 2026, Labor’s expansion of the First Home Guarantee is expected to drive property prices higher.” Dargan also argued that, “The government needs to take immediate action to increase housing supply if it wants Australia’s youth to have fair access to reasonably priced housing,” warning that “action or inaction now will decide whether we become a country of haves and have nots or remain one that gives a fair go to all.”
He also points out that the big banks had already adjusted their positions ahead of the RBA’s decision, explaining that “the big banks were ahead of the RBA on this, dropping fixed rates and shifting their predictions. Today’s move shows that economists, the banks, and the RBA are all in agreement that supporting our economy – not cooling inflation – is the major concern.”
Jonathan Preston, Senior Mortgage Broker at Home Loan Experts agrees this is a pivotal moment, saying, “The cut was widely anticipated, but it’s still a big moment. It signals that the RBA believes inflation is more under control and that it’s time to ease the burden on households and businesses.”
So, what does it mean for you?
Borrowers are likely to see immediate benefits from this cut, with lower variable rates and increasing competition in fixed-rate offerings.
Reportedly, all four major banks have already announced they will pass on the full 25 basis point cut to variable rate customers. Most reductions will take effect from 30 May, except for Westpac, which will implement changes from 3 June.
Preston notes that “lenders are already setting sharper fixed rates, and this move could accelerate competition,” suggesting that, “It’s a good time to reassess your rate and consider locking in if the pricing looks favourable.”
Still, Dargan cautions that this isn’t a free pass. He explains that, “Borrowers should take this as a green light, but not a reason to overextend. Property markets in Sydney and Melbourne are already warming up, and another cut or two could trigger a sharp jump in prices. It’s not the time to gamble, it’s the time for smart planning.”
Together, their views point to a window of opportunity, but one that’s best approached with a clear strategy and long-term thinking.
How Does The Cash Rate Affect My Interest Rate?
Lenders add a margin to the official cash rate to determine the variable interest rate they offer to customers. If you have a variable interest rate, it will almost certainly decrease when the cash rate is cut.
You can use our repayment calculator to find out what your repayments should look like whenever the cash rate changes.
