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

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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.

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.

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:

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.

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:

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.

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.”

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.

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:

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:

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:

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.

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.

Current interest rate forecasts from Australian banks include:

	Q2 2025	Q3 2025	Q4 2025	Q1 2026
Westpac	3.85	3.60	3.35	3.35
NAB	3.60	3.10	2.85	2.60
ING	3.85	3.60	3.35	3.35
CBA	3.85	3.60	3.35
ANZ	3.85	3.35	3.35

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:

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”.

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.

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.

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)? :

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.

The RBA’s May forecasts  predict unemployment will rise to 4.3% in December 2025.

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 latest Westpac–Melbourne Institute Consumer Sentiment Index in May 2025, suggests:

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%.

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.

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:

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%	2.25%
1 Year Ago	4.35%	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.

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.

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 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:

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.

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%.

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.

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