Interest Rate Forecast Australia: Will Rates Drop Below 3% In 2025?

Can Australians breathe a sigh of relief?

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Arielle Executive - Sydney, Melbourne, New York

Last updated: May 23rd, 2025

interest rate forecast australia
Arielle Executive - Sydney, Melbourne, New York

Last updated: May 23rd, 2025

Reading Time: 13 minutes

The Reserve Bank of Australia (RBA) is responsible for preventing runaway inflation and creating conditions for ‘price stability’.

The official cash rate is RBA’s weapon of choice, which influences the interest rates offered by banks and other lenders.

After more than four years of hikes and holds, the RBA finally cut rates at its meeting in February, 2025.

It cut rates again on 20th May – by 0.25%.

But opinions are divided on whether further cuts can be delivered.

Key Takeaways:
RBA is more confident of falling core inflation, but concerned over global growth due to tariffs and geopolitical uncertainties.
Many economists expect 2-3 additional rate cuts between May and November 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.

If you’re a homeowner, property investor or prospective homeowner (see our latest Australian property update), you’ll be hopeful that continued easing will increase your borrowing power or decrease your variable home loan repayments.

As an equity investor, you’ll be attuned to the effects of RBA rate changes on the value of your stock portfolio.

So, let’s forecast interest rates in Australia for the rest of 2025.

RBA Delivers The Second Rate Cut.

The official RBA cash rate was lowered by 25 basis points to 3.85% in May 2025.

It follows a 0.25% cut in February that broke the RBA’s holding pattern – it had been sitting at 4.35% since November 2023, unchanged for nine straight meetings.

Trimmed mean inflation slowing to 2.9% in the March quarter CPI (released in late April) gave the board greater confidence to cut.

With ongoing US recession and trade war fears and Australia’s strong labour market in spite of weak economic growth, upside risks to inflation have become more balanced.

 Above: The monthly CPI indicator was within the target range in the first three months of 2025.

The RBA said in its announcement of the rate cut decision:

“Inflation is in the target band and upside risks appear to have diminished as international developments are expected to weigh on the economy.”

The Board also said it was well-placed to respond decisively, using monetary policy, should global turmoil have severe downsides for Australia’s growth and inflation rate.

It “remains cautious about the outlook”.

(Related: Why Is The Cost Of Living In Australia So High?)

So, while the May meeting cut was largely expected, it’s far from certain that a multi-cut easing cycle has begun.

Although the view of commentators, and financial market pricing, suggests a potential further 50 basis points of cuts this year.

“Does it mean we're headed into a long series of interest rate cuts? I don’t know at this point and that's why I think the cautious 25-basis-point cut with a recognition that if we need to move quickly, we can. We have got space.” — Michele Bullock, RBA Governor. 

Bullock said the RBA was more comfortable that inflation is headed in the right direction, and unemployment was going “pretty well”, but it hasn’t ruled out the need to take action in future.

(Related: Will Australia Go Into A Recession In 2025?)

Two important upside 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 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.

The next quarterly CPI numbers drop on 30th July, 2025.

Hence the widespread view that a positive inflation print could prompt another interest rate cut at the Board’s 12th August meeting.

Complicating matters for the RBA is  market volatility and recession fears coming out of the US. 

The US Federal Reserve’s decision to hold rates in May 2025 reflects a wariness around the near-term effects of Trump’s policies. Fed Chair Jerome Powell said the US economy was “still in solid shape.”

Did you Know?

Sentiment scans show Australian consumers are no longer fearful that the RBA will raise rates. Despite hope for cuts, sentiment fell around the outlook for family finances.

With Australia’s federal election now decided, in favour of Labor, further government tax cuts and other cost-of-living relief promises will go ahead.

That includes extended energy bill subsidies, more funding for bulk billing and the Pharmaceutical Benefits Scheme.

Earlier in 2025, economist Warren Hogan described the idea of an RBA cut as “dangerous” - because inflation was higher than the CPI numbers suggest when adjusted for subsidies and volatile items.

“The risk is they do a rate cut just before the election, then in a few months' time have to put rates up. It will do their credibility and the politics of it all is diabolical,” Hogan said.

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 May, RBA Governor Bullock described the global situation - besieged by trade tensions - as a “complete rollercoaster”.

While the RBA thinks trade developments will be disinflationary, upside risks remain:

“There is a risk to inflation on the upside: trade policies could lead to supply chain issues, which could raise prices for some imports, much as we saw during the pandemic,” Bullock said.

In its May Statement on Monetary Policy (SMP), the RBA predicts higher tariffs could cause global growth to drag, and somewhat reduce prices for Australia’s exports - leading to a slightly lower inflation rate than previously expected.

However, it 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).

That would put deeper interest rate cuts back on the agenda.

While rate hikes are also possible if inflation starts trending upwards, major Australian banks and many leading economists think rates will keep moving downwards in 2025.

Of the 41 economists surveyed by Finder in May:

  • 3 in 4 expect two or more cuts in the next 12 months.
  • 35% expect an improvement in housing affordability under Labor, while 31% think it will get worse..

AMP Chief Economist Shane Oliver said the bank anticipates two cuts in August and November 2025, a third cut in February 2026 — and the chance of a July cut.

“With inflation now expected to be at target and the US trade war posing downside risks to the growth the chance of a cut in July is now likely close to 50%.” — Shane Oliver, AMP.

HSBC Chief Economist Paul Bloxham - ranked the top forecaster of 2024 by the AFR - had predicted just two cuts throughout 2025. That estimate has now changed to at least 75 basis points of additional cuts by early 2026.

“Our central case has the RBA delivering further cautious and gradual monetary easing, taking the cash rate to 3.10% by early 2026,” Bloxham said.

Current interest rate forecasts from Australian banks include:

Q2 2025Q3 2025Q4 2025Q1 2026
Westpac3.853.603.353.35
NAB3.603.102.852.60
ING3.853.603.353.35
CBA3.853.603.35
ANZ3.853.353.35

Important!

All 'big four' banks had to push back their estimates of a cut multiple times in 2024 due to variable CPI results (and because forecasting is hard!).

Although Westpac has a further two cuts pencilled in, noting the RBA’s rhetoric had shifted to the challenge of keeping Australia’s inflation within target. 

Chief Economist Luci Ellis said:

“At the same time, the RBA has no need to rush or to accelerate the pace of easing. At the new level of 3.85%, it is not that far from most estimates of the ‘neutral’ level that neither weighs on nor stimulates the economy…” - Luci Ellis, Westpac.

Head of Australian economics for Commbank, Gareth Aird, said the RBA’s lack of forward guidance on the likely timing of cuts leaves the door ajar for back-to-back 25bp cuts “if the domestic data makes the case or the global situation deteriorates more materially”.

“We are cognisant of the risk that the RBA moves a little more quickly to a neutral rate of ~3.35% if the trend unemployment rate steps up in a non-trivial way,” Aird said.

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.

Given the headline CPI figure of 2.4% for the March quarter, we’re now in positive territory.

Expert Tip.

“Real” interest rate is Australia’s cash rate adjusted for inflation. Subtracting CPI of 2.4 from the cash rate of 3.85 puts real interest at 1.45%.

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.

A previously forecast rise in unemployment didn’t eventuate, and the RBA thinks the labour market won’t ease much further.

It remains “alert” to the possibility that it’s overestimating labour market tightness - which if economic activity doesn’t pick up as expected - could see disinflation occur too quickly.

Australians’ real income (income adjusted for inflation) increased in the second half of 2024, albeit by less than expected.

Above: Real incomes recently lifted after 18 months of sharp decline.

While weak productivity is expected to increase gradually over the next two years, if that doesn’t eventuate the RBA isn’t sure how that will impact inflation.

Will consumer spending and wages adjust quickly (good) or slowly (bad)? :

“There may also be inflationary pressures from a protracted trade war that take longer to appear.” — RBA May Statement on Monetary Policy.

Important!

High employment levels can pressure employers to raise wages to compete, fuelling inflationary pressure without a sustainable lift in living standards.

According to ABS labour force data, unemployment has remained around 4% in seasonally adjusted terms for the first three months of 2025.

In April 2025 unemployment sat at 4.1% after 89,000 people entered work and 6,000 people become unemployed.

“In trend terms, the employment-to-population ratio remained at 64.3 per cent in April, while the participation rate remained at 67.0 per cent.” — Sean Crick, ABS head of labour statistics.

The RBA’s May forecasts  predict unemployment will rise to 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.

The psychological effects of higher prices matter, and can distort decision-making by both individuals and companies in ways that further embed inflation.

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 May 2025, suggests:

“Consumers are a little less downbeat on spending. The ‘time to buy a major household item’ sub-index rose 3.5% to 93.2.”

People were less optimistic about their family finances now versus a year ago (sentiment fell 0.8%).

There’s also continued pessimism from homebuyers, although the ‘time to buy a dwelling’ index did lift by 5.1%.

SQM Research expects a turnaround in the fortunes of housing markets that had been in decline.

Louis Christopher of SQM Research said Sydney and Melbourne house prices in particular would benefit from a series of rate cuts, provided unemployment holds steady.

“If we were to see a more dovish move by the Reserve Bank of Australia, I think they are the two cities where we are likely to see the largest response.”

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:

“The authorities have indicated they will front-load fiscal stimulus announced in their 2025 budget over the coming months and will do more to support growth if needed.” — RBA Statement on Monetary Policy, May 2025.

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.

“Trump's policy platform and likely leadership style will likely add further volatility to financial markets and global geopolitical tensions, but the impact on Australia may be more so via our largest trading partners than directly," according to Bendigo Bank’s David Robertson.

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.

(A modest 4.0% growth in economic activity is expected in 2025, according to IMF’s latest forecast.)

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:

AustraliaUSEnglandCanadaEU
Current3.85%4.25-4.50%4.25%2.75%2.25%
1 Year Ago4.35%5.25-5.50%5.25%5.00%4.00%

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 - and has made six cuts in the period to May 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.

But the tables turned quickly, sparked by the release of data showing the US unemployment rate increasing to 4.3% in July (up from 4.1% the previous month).

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 meeting.

The Fed eased again in November and December by 0.25%, but Chair Jerome Powell said recently that easing was on pause, dependent on the data.

The Fed’s decision to hold in January 2025 came under attack from President Donald Trump who claimed he’d ‘demand that interest rates drop immediately’.

The Fed held again in March and May 2025, with Chair Jerome Powell saying, “We don't have to be in a hurry. The economy is resilient and doing fairly well.”

Recent indicators the Fed will use to determine the need for future cuts include:

  • A 0.2% increase in prices in April 2025, following a decline of 0.1% in March.
  • An unemployment rate of 4.2% in April, unchanged from the month prior.
  • Declining consumer spending, with fourth quarter 2024 GDP figures coming in at 2.4%, and decreasing by 0.3% in Q1 2025 (advance estimate).

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.

Goldman Sachs revised down its GDP growth forecast for Australia to 1.8% (compared to 2%) due to “negative spillovers” from tariffs on Chinese imports.

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:

“So far, policy has been to subsidise demand and leaving it again to the RBA as the last resort.”

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.

It was slashed back to 3.25% by the start of 2009. Since then, there have been various hiking and tightening cycles to keep inflation stable.

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:

“The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected.”

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 2.4% (reflecting price rises in the 12 months from March 2024 to March 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.

Inflation, the economy and unemployment domestically are also affected by a range of global factors, such as the growth of our trading partners and catastrophic events that can’t be foreseen.

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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