May Cash Rate Update: RBA Cuts Rates to 3.85%

May Cash Rate Update: RBA Cuts Rates to 3.85%

In a widely anticipated move, the Reserve Bank of Australia (RBA) has reduced the official cash rate by 25 basis points, bringing it down to 3.85 per cent following its May monetary policy meeting six days ago. This marks the RBA’s first rate cut in nearly three years, signalling a shift in economic strategy as inflation finally returns to within the target range.

The central bank’s decision comes after the Australian Bureau of Statistics reported a fall in annual trimmed mean inflation, the RBA’s preferred inflation gauge, from 3.3 per cent in December 2024 to 2.9 per cent in March 2025. This drop has brought inflation back inside the RBA’s long-standing target range of 2 to 3 per cent, easing pressure on household budgets and prompting the central bank to loosen monetary policy.

The full May RBA statement is available to read here.

Why the RBA Cut Rates Now

The RBA has kept interest rates relatively high since 2022 to contain inflation, which had surged due to global supply disruptions, high energy prices, and strong domestic demand. Those rate hikes were necessary for a time to slow spending and cool the economy.

But now, with inflation easing and growth slowing, the bank is pivoting. Lower rates should provide a more supportive environment for households and businesses, particularly as cost-of-living pressures and mortgage repayments have strained many family budgets.

In addition to falling inflation, the RBA likely considered other economic signals:

• Consumer sentiment has remained low, suggesting households are still cautious with spending
• Retail trade figures have softened, particularly in discretionary categories
• The labour market has begun to loosen, with job ads declining and underemployment inching higher

This creates the backdrop for today’s decision, a sign that the RBA believes tighter policy has done its job, at least for now.

What This Means for Mortgage Holders

If you have a variable-rate home loan, today’s news could bring some relief. While lenders are not required to follow the RBA’s lead, they usually do. Most major banks and lenders are expected to pass on the 0.25 per cent reduction in whole or in part over the coming weeks.

To put this into perspective:

On a $600,000 loan with a 30-year term, a 0.25 per cent rate reduction could save you around $90 per month or over 1,000 per year in repayments.

For those on fixed-rate loans, your interest rate will not change until your fixed term ends, but this move signals a turning point. If you are coming off a fixed loan in the next 6 to 12 months, now is the time to start planning for what is next and consider refinancing options in a more favourable rate environment.

First Home Buyers and Investors: New Opportunities

The RBA’s decision could also help home buyers grappling with higher borrowing costs and tight lending conditions. A lower cash rate means lower borrowing costs and potentially higher borrowing capacity, especially if lenders begin adjusting their serviceability calculators.

For property investors, the equation is slightly more complex. While a rate cut helps with cash flow, rental yields remain under pressure in some areas, and negative gearing is still a factor for many. That said, falling rates can boost market confidence and buyer activity, particularly in capital cities where housing demand remains strong.

If the RBA continues to ease rates later this year, we could see a resurgence in investor demand, especially for well-located properties with strong rental prospects.

Will There Be More Rate Cuts in 2025?

It is possible. This month’s rate cut could be the first of several, but that will depend on a few moving parts:

• Inflation needs to stay comfortably within the 2 to 3 per cent range
• The labour market must remain stable, or else the RBA may act more aggressively to support growth
• Global risks, such as trade tensions or financial instability, could either slow or accelerate further cuts

Markets are already pricing in at least one or two more rate cuts before the end of 2025, but nothing is guaranteed. The RBA will continue to assess data month by month.

What Should You Do Now

Whether you are a current mortgage holder, a hopeful buyer, or an investor, this rate cut is a chance to reassess your position.

Here are a few smart next steps:

• Review your current home loan to make sure your rate is still competitive
• Get pre-approved if you are planning to buy, so you can move quickly as the market adjusts
• Talk to your broker or lender to understand how this change affects your repayments, borrowing power, and financial goals

Last Thoughts

This month’s cash rate cut is more than a technical adjustment. It’s a sign that Australia’s economic landscape is shifting. Borrowers hear the word relief instead of tightening for the first time in years.

Whether more cuts follow will depend on how the economy evolves in the months ahead. In the meantime, it is worth staying informed, getting advice, and positioning yourself to make the most of this new phase in the interest rate cycle.

If you are unsure what this change means for you, our team at Rateseeker is here to help.
Let’s look at your goals in 2025 and explore how to make the most of the opportunities opening up in the months ahead.