CASH RATE
Following the RBA Board meeting on 20 May 2025, the Reserve Bank of Australia cut the official cash rate by 25 basis points, bringing it down to 3.85%.
This signals continued movement away from the RBA’s previous tightening stance, reflecting growing confidence that inflation is under control. Annual trimmed mean inflation fell to 2.9% in the March quarter, below 3% for the first time since 2021, while headline inflation came in at 2.4%, placing both measures within the RBA’s target band of 2–3%.
RBA Governor Michele Bullock explained: “Price increases have slowed and it’s fairly broadly based – and this is very good news. The Board’s strategy over quite some time has been to bring inflation down while avoiding a sharp rise in unemployment. The cautious approach we have taken has got us to this point where inflation is now below 3% and employment is holding up.” (Sky News Australia)
Despite a still-tight labour market and signs of recovery in household incomes and private demand, the RBA highlighted increased global uncertainty, particularly around trade tariffs and geopolitical tensions, as a potential drag on economic activity. These international developments, alongside softening domestic consumption, contributed to the Board’s decision to slightly ease monetary policy while remaining cautious.
The Board will closely monitor inflation, labour market dynamics, and global financial conditions as it evaluates potential adjustments to the cash rate.
The next interest rate decision will be announced at the RBA Board meeting on 8 July 2025.
Key takeaways from the RBA’s statement:
- Cash Rate Reduced to 3.85%: After holding steady in April, the RBA has resumed its easing cycle with a 0.25% cut in May. This move reflects growing confidence that inflation is under control and that further support is needed to sustain household spending and economic momentum.
- Inflation Within Target Range: Both headline and core inflation have continued to trend lower, with recent data confirming inflation remains within the RBA’s 2–3% target band. The Board noted that while progress is encouraging, they remain cautious and data-dependent moving forward.
- Global uncertainty rising: Geopolitical tensions and shifting trade policies are weighing on confidence and could dampen global and domestic activity.
- Labour market still tight: Despite softer wage growth, employment remains strong, and labour shortages persist, keeping unit labour costs elevated.
Rate Expectations
On 20 May 2025, the Reserve Bank of Australia (RBA) cut the official cash rate by 25 basis points, bringing it down to 3.85%.
As of 23 May, the ASX 30 Day Interbank Cash Rate Futures (July 2025 contract) was trading at 96.285, suggesting a 67% chance of another rate cut — this time to 3.60% — at the upcoming meeting.
Inflation
- Underlying Inflation: Annual trimmed mean inflation fell to 2.9% in the March quarter, down from 3.3% in the previous quarter. This marks the first time since 2021 that this core measure has fallen within the Reserve Bank of Australia’s (RBA) target band of 2–3%, indicating a continued easing of underlying price pressures.
- Headline Inflation: Headline Consumer Price Index (CPI) inflation remained steady at 2.4% year-on-year in the March quarter, matching the previous quarter’s rate. The RBA anticipates a temporary rise in headline inflation above 3% in the second half of 2025 as government subsidies, such as electricity rebates, are phased out. However, it expects inflation to return to the midpoint of the target range later in the forecast period.
- Household Inflation (CPI): Housing costs increased by 2.0% over the year to March 2025, with rents up 5.5% and new dwelling prices rising by 1.4%. Food and non-alcoholic beverage prices rose by 3.2%, driven by a 6.6% increase in fruit and vegetable prices. Electricity prices saw a significant rise of 16.3% in the March quarter, particularly in regions where government rebates had been exhausted.
- RBA Stance & Outlook: On May 20, 2025, the RBA reduced the official cash rate by 25 basis points to 3.85%, citing substantial progress in controlling inflation. Governor Michele Bullock emphasised that inflation is now within the 2–3% target band, suggesting a “soft landing” has been achieved. The RBA remains open to further easing if necessary, especially in light of global uncertainties such as new tariffs and their potential adverse effects on economic activity.
(Source: RBA)
Property Market Update
- Home Values Hit Record Highs: National dwelling values rose 0.3% in April, marking three straight months of growth despite slower momentum and growing uncertainty from tariffs and the federal election.
- Listings and Auctions Drop Sharply: Auction volumes and new listings hit their lowest April levels since 2019, as public holidays and market uncertainty led many buyers and sellers to hold off.
- Regional and House Markets Lead: Regional areas (+0.6%) outpaced capital cities (+0.2%), while house values continued to outperform units, especially in Sydney and Hobart.
(Source: CoreLogic Hedonic Home Value Index – Embargoed 1st of May 2025)
Rental Market Update
- Rental Growth Slowing Annually: While rents rose 0.6% monthly for the third straight month, annual growth has slowed significantly, from 8.3% to 3.6%, with most capitals showing sharp deceleration.
- Perth, Melbourne & Sydney Lead the Slowdown: Perth saw the steepest drop in annual rental growth (13.6% → 5.7%), while Melbourne (9.4% → 2.0%) and Sydney (now just 1.9%) recorded their slowest rises in years.
- Yields Improve as Rents Outpace Prices: National gross rental yields hit a two-year high of 3.73% in April, driven by rents rising faster than home values; regional yields remain stronger at 4.41%.
(Source: CoreLogic Hedonic Home Value Index – Embargoed 1st of May 2025)
Lending Data
- Housing Finance:
- The total number of new loan commitments for dwellings fell 3.5% in the March quarter, while the total value dropped 1.6%.
- First home buyer activity was weaker, with the number of commitments down 4.2% and value down 3.2%.
- Despite quarterly declines, year-on-year growth remained strong, with investor loan values up 16.0% and total loan values up 14.2% compared to March 2024.
- Personal Finance:
- The value of new personal loan commitments rose slightly by 0.2% over the quarter, marking a 12.9% increase year-on-year.
- Road vehicle loans edged down 0.6%, while loans for other purposes (e.g. holidays, household goods) fell 3.0%.
- Business Finance:
- New loan commitments for construction fell sharply, down 27.4% in the quarter, though still 4.6% higher than a year ago.
- Loans for property purchases increased 1.1% in the quarter and were up 11.6% year-on-year, indicating ongoing strength in property-related business lending.
(Source: ABS)
