Last updated: February 26th, 2025
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 on 18th February, 2025. But opinions are divided on whether further cuts can be delivered.
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 early 2025.
| Key Takeaways: |
|---|
| RBA is looking cautious, with its recent statement expressing confidence in falling inflation, but concern that disinflation could stall. |
| Many economists expect two additional rate cuts in May and August 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. |
The RBA Finally Cut On 18th Of February.
The official RBA cash rate was lowered by 25 basis points to 4.10% in February 2025.
The policy rate had been sitting at 4.35% since November 2023, unchanged for nine straight meetings.
However, given ongoing US recession and trade war fears and Australia’s strong labour market in spite of weak economic growth, upside risks to inflation linger.
Above: The monthly CPI indicator alarmed the market by rising to 4.0% in May, but backed off to 2.5% by December 2024.
The RBA said in its announcement of the rate cut decision:
So, while the cut was largely expected, it’s far from certain that a multi-cut easing cycle has begun. Although their view of commentators, and financial market pricing, suggests a potential further 50 basis points of cuts this year.
RBA Governor Michele Bullock was quick to say “more evidence” would be needed and that the market was “far too confident”.
Bullock said that the period of higher rates had worked to put downward pressure on price rises, but a temporary dip back into the target range (Bullock’s goal is 2.5%) wouldn’t be good enough.
(Related: Will Australia Go Into A Recession In 2025?)
The temporary effect of government subsidy measures is a factor here. When the subsidies expire, services prices will lift again.
Two important upside risks cited by the RBA include:
- Unexpectedly strong labour market data suggested a tighter than expected market.
- 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.
Hence the widespread view that a positive inflation print could prompt another interest rate cut at the Board’s 19th May meeting.
(Related: Why Is Cost Of Living In Australia So High?)
In particular, the US Federal Reserve’s decision to cut rates by 50 basis points in September 2024, and a further 0.25% in both November and December, has put the RBA under more political pressure to cut.
The US had been struggling with ‘last mile’ inflation earlier in 2024, but higher-than-expected unemployment figures forced the Fed to move. For now, though, the Fed’s cutting cycle is on pause as it waits to see how Trump’s policies are enacted.
Did you Know?
Sentiment scans show consumers are no longer fearful that the RBA will raise rates. Over half now expect mortgage rates to be unchanged or lower over the year ahead.
A looming federal election in Australia is also muddying the waters. Speculation has been flying about a possible snap election to enable Labor to capitalise on the cut decision.
Earlier in February, economist Warren Hogan described the idea of an RBA cut as “dangerous” because inflation was higher than the CPI numbers suggest when you subtract subsidies and volatile items.
Australia’s 5-Year Official Cash Rate Outlook.
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.
But RBA Governor Bullock is keen to see supply-side recovery, which is impacted by constraints in labour availability and slow productivity growth.
She urged Australians hurting from high mortgage rates to “be patient”.
Global tensions and Trump’s tariffs also threaten to accelerate inflation again. Australian Treasurer Jim Chalmers said it was a concern for our trade-exposed economy:
While more short-term rate hikes are possible if inflation starts trending upwards, major Australian banks and many leading economists think rates will keep moving downwards in 2025.
Of the 38 economists surveyed by Finder in February:
- More than 60% expect another interest rate cut in May.
- Three in four think that even if proposed Trump tariffs go ahead, it won’t deter the RBA from lowering rates.
AMP Chief Economist Shane Oliver said a slow easing cycle was likely, with three rate cuts in total over 2025:
HSBC Chief Economist Paul Bloxham — ranked the top forecaster of 2024 by the AFR — thinks two cuts will be warranted as the RBA looks to support the economy, with the second likely in September.
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 | 3.85 | 3.60 | 3.35 | 3.10 |
| ING | 3.85 | 3.60 | 3.35 | 3.35 |
| CBA | 3.85 | 3.60 | 3.35 | |
| ANZ | 4.10 | 3.85 | 3.85 |
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 four cuts pencilled in, it noted the wariness shown by the RBA in signalling that, for now, this is just one rate cut. Senior Economist Justin Smirk said:
Head of Australian economics for Commbank, Gareth Aird, said the RBA can move slowly to normalise the cash rate due to employment numbers being so robust.
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 2024-25, 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 2.4 from the cash rate of 4.10 puts real interest at 1.7%.
4 Economic Factors That Could Impact 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)? :
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 was below 4% in seasonally adjusted terms for the first three months of 2024.
Unemployment reached 4.2% in July. It spent a few months at 4.1%, and briefly dipped to 3.9%.
In January 2025 unemployment sat at 4.1% after 44,000 people entered work and 23,000 people become unemployed.
The RBA’s February forecasts predict unemployment will rise to 4.2% 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 February 2025, suggests:
People were less optimistic about their family finances now versus a year ago (the index fell 10.6% compared to December).
There’s also continued pessimism from homebuyers, which “may reflect expectations of a renewed lift in prices.”
Louis Christopher of SQM Research said tight rental markets and ‘fear of missing out’ would lift confidence and boost first home buyer activity:
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 September quarter 2024, released 4 December, 2024) shows the economy rose just 0.3% from the previous quarter.
That represents an annual rise of 0.8%.
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 February 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 did revise up its 2025 GDP growth estimate for China, based on stimulus announcements, stating its government’s pro-growth stance should counteract Trump’s moves:
4. Global Volatility.
Domestic factors are naturally impacted by major downturns, conflicts or catastrophes globally that impact 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 will deteriorate 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.
How Are Global Interest Rates Changing?
Here’s how our central bank’s policy rate compares to other major economies:
| Australia | US | England | Canada | EU | |
|---|---|---|---|---|---|
| Current | 4.10% | 4.25-4.50% | 4.50% | 3.00% | 2.75% |
| 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 five cuts in the period to January 2025.
Important!
With UK inflation falling within the target range in May, the Bank of England cut its cash rate by 25 basis points in August from a 16-year high. It cut a further 0.25% in November and again in February 2025.
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.
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.
Recent indicators the Fed will use to determine the need for future cuts include:
- A 0.5% increase in prices in January, following an increase of 0.4% in December, for an annual inflation figure of 3.0%.
- A declining unemployment rate, falling to 4.0% in January from 4.1% in December and 4.2% in November.
- Steady consumer spending, with fourth quarter GDP figures coming in at 2.3%, and 3.1% in Quarter 3 2024.
However, borrowing is still expensive and the world’s largest economy could also face 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.
What About 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 0.3 percentage points to GDP growth.
Rises in government expenditure were attributed to health programs through Medicare and the Pharmaceutical Benefits Scheme, and energy bill relief payments by some state governments.
Stage 3 tax cuts that were rolled out from July are estimated to have added just 0.1% to inflation.
Expert Tip.
Electricity bill credit of $300 for all Australians announced in the May budget was expected to shave off a few percentage points from the CPI.
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 3.8% (reflecting price rises in the 12 months from June 2023 to June 2024), 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 a modest easing cycle will continue throughout 2025.
Warnings are still sounding in some circles about the need for rates to move higher to squash inflation — and conversely, the risk of waiting too long to stimulate growth. Especially if the US doesn’t achieve a soft landing and embroils multiple nations in a tit-for-tat economic spat.
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
Nelson says:
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John Keys says:
CMC Invest are an abysmal in turning around new accounts.
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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:
Unless you can see into the future or time travel, try to refrain from predicting a stronger AUD. It’s now Dec 2025 and contrary to all you top earning ‘economists ‘, the AUD ain’t shit.