Where are interest Rates Headed In 2025?

The Reserve Bank of Australia (RBA) is anticipated to implement multiple interest rate cuts in 2025, looking to alleviate financial pressure on households and stimulate economic growth.

Current Economic Indicators

As of May 2025, the RBA has already reduced the cash rate from its peak of 4.35% to 4.10% in February. A further cut to 3.85% is widely expected at the upcoming May 20 meeting, driven by easing inflation and moderated wage growth. Core inflation has declined to 2.9%, re-entering the RBA’s target range for the first time since late 2021.

Wage growth increased by 0.9% in the March quarter, bringing the annual rate to 3.4%. This uptick was primarily due to temporary public sector pay awards, with private sector wage growth remaining steady at 3.3% .

What the Banks Forecast

Major financial institutions project a series of rate cuts throughout 2025:

• National Australia Bank (NAB): Predicts a 50 basis point cut in May, followed by 25 basis point reductions in July, August, and November, bringing the cash rate to 2.85% by year-end .
• Commonwealth Bank (CBA): Anticipates quarterly cuts, reaching a cash rate of 3.35% by December .
• Westpac and ANZ: Both forecast cuts in May, August, and November, with the cash rate settling at 3.35% by the end of 2025 .

These projections suggest a gradual easing cycle, with the cash rate potentially reaching as low as 2.6% by February 2026 .

Implications for Borrowers and the Economy

While rate cuts are expected to provide relief to mortgage holders, experts caution that the benefits may take six to nine months to materialize fully. High household debt levels and cost-of-living pressures continue to pose challenges, with approximately 1.45 million Australians still at risk of mortgage stress.

Additionally, the anticipated rate reductions may influence the housing market. A new first homebuyer guarantee scheme, set to launch in January 2026, is expected to drive property prices higher, particularly in the sub-$1 million segment 

The RBA's projected interest rate cuts in 2025 reflect a strategic response to moderating inflation and wage growth. While offering potential relief to borrowers, the broader economic impact will depend on various factors, including household debt levels, consumer spending, and housing market dynamics.