Last updated: August 14th, 2025
After more than four years of hikes and holds, the RBA finally cut interest rates at its meeting in February, 2025.
It cut rates again in May and August, by 0.25% each time.
But it surprised us all by deciding to leave rates unchanged back in July.
Opinions are divided on how many further cuts are likely in 2025. But my forecast below will help you predict the RBA’s next move.
| Key Takeaways: |
|---|
| RBA is more confident of falling core inflation, but concerned over global growth due to tariffs and geopolitical uncertainties. |
| Many economists expect 1-2 additional rate cuts between September and December 2025. |
| Financial markets are also pricing in a further 50bp of rate cuts by the end of 2025. |
| Persistent inflation and factors including labour market tightness, spending recovery, slow GDP growth and global volatility also pose upside risks. |
RBA Hit Pause On Delivering A Third Rate Cut.
The official RBA cash rate was lowered by 25 basis points to 3.60% in August 2025.
But uncertainties abound, and the RBA’s Board are a cautious lot.
Above: The monthly CPI indicator was within the target range in the first five months of 2025.
The RBA said in its announcement of the August rate decision:
And RBA Governor Michelle Bullock confirmed that “Monetary policy has been working as intended and we’ve had good progress on bringing inflation down over the past 18 months”.
(Related: Why Is The Cost Of Living In Australia So High?)
Continued easing of underlying inflation was confirmed by the latest quarterly CPI numbers that dropped on 30th July, 2025.
Important!
The CPI print showed headline inflation at 2.1%, and a trimmed mean of 2.7%. That’s closer to the the mid-point of the target range — which is the RBA’s goal.
It reinforced the widespread view that we’ll see another interest rate cut at the Board’s 29th-30th September meeting.
Following the positive CPI result, commentators and financial market pricing now suggest a potential further 50 basis points of cuts this year.
(Related: Best Cryptocurrency Exchanges In Australia).
Especially in light of weaker-than-expected jobs data for June (released 17 July) showing unemployment rose to 4.3%, compared to expectations of 4.1%.
Westpac’s Luci Ellis had anticipated that a cut in July wasn’t “the near-100% certainty that the market predicts.”
She said the latest inflation data would have come as a relief to the RBA, solidifying their case for continued monetary easing:
(Related: Will Australia Go Into A Recession In 2025?)
The extent and timing of cuts are not set in stone. Three important risks cited by the RBA include:
- Uncertainty about the final scope and impact of US tariffs and policy responses on global economic activity.
- Uncertainty about whether productivity growth will pick up to justify labour costs, which remain high.
- Uncertainty about how strong the recovery in household spending will be moving forward.
Above: Despite the rates reprieve, which is being passed on in full by major lenders, Australian housing affordability remains stretched due to elevated borrowing costs.
While the US economy has proven remarkably resilient, there are cracks that could split wide open.
The US Federal Reserve’s decision to hold rates in May and June of 2025 reflects a wariness around the near-term effects of President Trump’s policies.
Important!
Chair Jerome Powell admitted in July that the Fed would have cut interest rates in the US before now if it weren’t for the tariffs.
He said all inflation forecasts had risen, and it’s still too soon to understand the effects of the tariffs.
No one was expecting a rate cut when the Fed met on 31st July, despite pressure being applied by President Trump.
The central bank held rates steady, although not by consensus.
Two Trump-appointed board members dissented.
Did you Know?
Sentiment scans show Australian consumers are no longer fearful that the RBA will raise rates. Alongside hope for cuts, sentiment is more positive around the outlook for family finances.
Following Labor’s landslide victory at the election in May, further government tax cuts and other cost-of-living relief promises have started to progress.
A raft of measures rolled out as of 1st July, including an increase in Centrelink payments, new healthcare items covered by Medicare, longer paid leave for parents, and energy bill subsidies.
5-Year Interest Rate Forecast For Australia.
The Australian economy is expected to perform better in 2025 - but still sub-trend - driven by an increase in household consumption on the back of higher wages.
In its May Statement on Monetary Policy (SMP), the RBA modelled a scenario where an escalating trade war could lead to:
- A 3% drop in GDP growth compared to its baseline forecast (which puts GDP at 2.2% by year-end 2026).
- Unemployment rising to nearly 6% (compared to the baseline of 4.3% predicted).
- Inflation slowing to around 2% at the end of 2026 (based on cash rate following the market path).
However, in July, Governor Bullock said the likelihood of the severe downside scenario had abated.
Financial markets have largely rebounded.
And while the RBA thinks trade developments will be disinflationary, it now worries demand could be dampened too much:
Bullock said decisions on further interest rate cuts would be made through a “cautious, gradual approach.”
Major Australian banks and many leading economists are confident rates will keep moving downwards in 2025 and 2026.
Of the 34 economists and experts surveyed by Finder in July:
- 44% said the cost-of-living crisis is now over.
- Over 50% expect cash rate cuts in both August and November.
AMP Chief Economist Shane Oliver said the bank anticipates two 0.25% cuts in August and November 2025, and two more cuts in February and May of 2026.
Economists from Commonwealth Bank agree that 0.25% cuts will come in both August and November, and highlighted some potential economic concerns that could drive easing:
Current interest rate forecasts from Australian banks include:
| Q3 2025 | Q4 2025 | Q1 2026 | Q2 2026 | |
|---|---|---|---|---|
| Westpac | 3.60 | 3.35 | 3.10 | 2.85 |
| NAB | 3.60 | 3.35 | 3.10 | 3.10 |
| ING | 3.60 | 3.35 | 3.10 | 3.10 |
| CBA | 3.60 | 3.35 | ||
| ANZ | 3.60 | 3.35 | ||
| AMP | 3.60 | 3.35 | 3.10 | 2.85 |
Westpac’s predicted timeline for cuts mirrors AMP’s — which would take the cash rate to 2.85 by mid-2026.
Judo Bank’s chief economic adviser Warren Hogan is less certain about how low the cash rate will go. He thinks two cuts could be the full extent of easing.
Above: OECD's projected cash rate compared with that of G7 economies.
OECD’s long-term interest rates forecast for Australia also predicts a decline in rates throughout 2025, with rates hitting the 3.1% mark by the end of 2025.
The OECD forecast is based on the projected values of government bonds maturing in 10 years and an overall assessment of the economic climate.
A number of pundits have previously said that hawkish monetary policy would continue as long as ‘real’ interest rates were in the negative.
Expert Tip.
“Real” interest rate is Australia’s cash rate adjusted for inflation. Subtracting CPI of 2.1 from the cash rate of 3.85 puts real interest at 1.75%.
The Top 4 Economic Drivers Behind Rate Cuts.
The RBA describes the economic outlook as “uncertain”, and downside risks could emerge in 2025 that would see tightening back on the agenda.
Here’s what to watch:
1. Unemployment And Wages.
The seasonally adjusted unemployment rate rose to 4.3% in June 2025— above what was forecast.
An expected uptick in productivity hasn’t eventuated, and the RBA pointed out that “growth in unit labour costs remains high.”
Above: Real incomes recently lifted after 18 months of sharp decline.
But Governor Michele Bullock said in a speech in July that unemployment numbers tend to “jump around” and the June jobless result was “pretty much on mark” (the RBA had forecast 4.2%).
It's still a tight labour market, according the the RBA.
But it’s attuned to the possibility of a sharper deterioration in jobless figures if economic activity doesn’t pick up as expected.
Important!
High employment levels can pressure employers to raise wages to compete, fuelling inflationary pressure without a sustainable lift in living standards.
ABS labour force data shows there was an increase of 34,000 unemployed people in June 2025, and a 2,000 increase in employed people.
The RBA’s May forecasts predict an unemployment rate of 4.3% in December 2025.
Did You Know?
Full employment doesn’t mean 100% of Australians work. In fact, there’s no defined numerical target for what constitutes full employment. The RBA assesses the maximum level required to maintain stable inflation.
2. Consumer Sentiment And Behaviours.
The RBA has repeatedly warned of the dire consequences of not returning to target inflation levels quickly enough.
In particular, if high prices become entrenched in ordinary people’s day-to-day expectations, even higher interest rates could be needed to reduce inflation down the track.
Expert Tip.
For instance, rather than cutting back, a person might make a big purchase now to avoid the expectation of having to pay more in future.
The latest Westpac–Melbourne Institute Consumer Sentiment Index in July 2025, suggests the consumer mood is stuck at ‘cautiously pessimistic’ levels:
But three of the Index’s five sub-indexes ticked higher, including people’s optimism about their family finances now versus a year ago (sentiment rose 5%).
Did You Know?
There’s continued pessimism from homebuyers — the ‘time to buy a dwelling’ index declined by 5.1%, due to the RBA’s decision to leave rates unchanged.
3. GDP Growth.
A robust economy, supported by GDP growth, helps create a case for lowering interest rates.
The Australian economy’s growth has slowed down.
The latest National Accounts data from the ABS (for the December quarter 2024, released 5th March, 2025) shows the economy rose 0.6% from the previous quarter.
That represents an annual rise of 1.3%.
Above: Aggressive rate hikes have taken a toll, with the Australian economy cooling and bolstering the case for further rate cuts in mid 2025.
A recovery in consumer spending is forecast by the RBA, stabilising at around the estimated historical trend growth rate by the end of 2025.
But its May forecast is softer than what it forecast last November - 2.1% GDP growth compared to 2.2% previously.
The outlook reflects:
- Expected easing of the cash rate over the forecast period.
- A pick-up in household spending and stronger public spending.
- Persistent labour market tightness with elevated vacancies and a high participation rate.
- A weaker than anticipated outlook on productivity growth.
- A pick up in business investment and easing construction costs.
- Disruption to global trade and supply chains caused by US tariffs, weighing on global growth.
- Continued slow growth in China’s economy, due to the continued weakness in its property sector.
The RBA thinks the slowing of the Chinese economy will be modest, believing that government stimulus should largely counteract Trump’s moves:
4. Global Volatility.
Domestic factors are naturally impacted by major downturns, conflicts or catastrophes globally.
Especially if they have an outside impact on our terms of trade and the cost of imported goods.
A number of economic experts think Donald Trump’s return to the White House will be bad for Australia’s economy.
Our economy is especially exposed to the risk that the Chinese economy’s performance deteriorates further, given its stressed property market and high youth unemployment rate.
Supply-side, the price of fuel, food and other goods locally could rise further depending on conflicts in Ukraine and the Middle East.
Global Interest Rates: Turning Point Or Pause?
Here’s how our central bank’s policy rate compares to other major economies:
| Australia | US | England | Canada | EU | |
|---|---|---|---|---|---|
| Current | 3.85% | 4.25-4.50% | 4.25% | 2.75% | 2.00% |
| 1 Year Ago | 4.35% | 5.25-5.50% | 5.25% | 4.5% | 3.75% |
Of the major economies’ central banks, Canada’s was the first to begin monetary policy easing, cutting its cash rate by 25 basis points at its 5th June 2024 meeting.
The European Central Bank also dropped its interest rate in June 2024 - and has made seven additional cuts in the period to June 2025.
Important!
With UK inflation falling within the target range in May 2024, the Bank of England cut its cash rate by 25 basis points in August 2024 from a 16-year high. It cut a further 0.25% in November 2024, and again in February and May 2025.
Bank of England’s chief economist, Huw Pill described the pace of rate cuts as “too rapid” following BoE’s May decision. UK financial markets think two more cuts are likely.
Hopes of a rate-cutting cycle beginning as early as March 2024 in the US were dashed due to four straight months of increasing inflation at the start of 2024.
The US Federal Reserve held rates for a ninth straight time at its meeting in August 2024.
An incredible sell-off across global stock markets was triggered as the data flagged the potential for a US recession.
Market losses were exacerbated by investors scrambling to exit carry trades and derivative positions in Japan after the yen appreciated in value - on the back of the Bank of Japan lifting interest rates to 0.25%.
There was talk of an inter-meeting rate cut to stave off the risk of recession.
Important!
That didn’t eventuate — but the Federal Reserve did deliver a whopping 50 basis point cut at its September 2024 meeting.
The Fed eased again in November and December 2024 by 0.25%, but Chair Jerome Powell said recently that easing was on pause, dependent on the data.
The Fed held again in March, May, June and July 2025, and there’s no clear sign of when cuts could come. Chair Jerome Powell said, “We have made no decisions about September.”
Recent indicators the Fed will use to determine the need for future cuts include:
- A 0.3% increase in prices in June 2025, following a smaller increase of 0.1% in May.
- An unemployment rate of 4.1% in June, slightly lower than the 4.2% result from the month prior.
- Rebounding GDP growth in the second quarter of 2025 (3% advanced estimate), after the economy contracted for the first time in three years in Q1 (-0.5%).
However, borrowing is still expensive and the world’s largest economy is facing turbulence arising from Donald Trump’s policies.
For instance, the potential for Trump’s proposed tariffs to fuel intractable US inflation — which has flow-on effects globally.
All Eyes On Rates — But Who Is Watching Fiscal Policy?
Monetary policy is not the only tool to combat inflation and, therefore, influence rates.
Important!
Fiscal policy is also vital - how the elected government intervenes to grow the economy or curtail/encourage consumption, such as through taxation, investments and initiatives.
Subsidies designed to ease cost-of-living pressures have been criticised as potentially encouraging spending, the same way stimulus cash does.
Former RBA board member Warwick McKibbin was quoted as stating:
The recent ABS National Accounts data shows that government spending contributed 0.1 percentage points to GDP growth.
Rises in government expenditure were attributed to public sector hiring, defence expenditure, health programs through Medicare and the Pharmaceutical Benefits Scheme, and energy bill relief payments by some state governments.
What Is RBA's Historical Monetary Policy?
Australia’s cash rate spiked to one of its highest points of 7.5% in 2008, at the height of the Global Financial Crisis.
More recently, amid uncertainty about the impact of the COVID-19 pandemic - which first became widespread within Australia in early 2020 - the cash rate was lowered to bolster the economy.
However, as inflation started picking up, the RBA moved to start normalising interest rates again.
The RBA Governor at the time, Philip Lowe, said:
In particular, Australia’s property market saw record-breaking price increases, and supply disruptions from the pandemic and the Russia-Ukraine conflict also reduced Aussies’ purchasing power. Inflation hit a 30-year high at the end of 2022, reaching 7.8%.
Important!
The RBA implemented an unprecedented 12 consecutive interest rate rises that kicked off in May 2022 after 16 months of the rate sitting at 0.10% since November 2020.
Prior to those hikes, interest rates hadn’t been over 4% for more than 11 years (since April 2012 when the rate was 4.25%).
The rate increase in November 2023 took the run of rises to 13.
Important!
Currently inflation is at 2.1% (reflecting price rises in the 12 months from June 2024 to June 2025), with the most significant rises attributed to rent, housing, food, fuel, insurance and healthcare.
Final Thoughts On Australia’s Interest Rate Forecast.
There are too many variables and unknowns to reliably predict interest rates over the coming five years in Australia.
But the consensus among economists is that the easing cycle will continue throughout 2025.
Warnings are still sounding in some circles about the need to fix broader economic issues (i.e., weak productivity) - and the fact Trump’s tariffs could trigger higher inflation that could bring rate hikes back into play.
What does it mean for your property purchasing or investment plans? Some would argue the best time to buy or invest is simply when you can afford it.
A best practice tip for anyone securing a home loan is to always budget for higher than the minimum repayments to allow for the inevitable changes in interest rates.
Jody
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Reg Watson says:
Given that China’s economy is going down the toilet how the heck do we expect an appreciation of the Aussie in 2024 ? We are tied to China.
Regular citizen says:
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