RBA Cuts Cash Rate to 3.85% – What It Means for Borrowers, the Economy, and the Property Market

In a widely anticipated move, the Reserve Bank of Australia (RBA) has reduced the official cash rate by 25 basis points, bringing it to 3.85% as of May 2025. This decision reflects the RBA’s confidence in the progress made on inflation, while also acknowledging the need to support economic momentum amid global and domestic uncertainties.

Inflation Eases, Supporting Monetary Policy Shift

According to the Australian Bureau of Statistics, the Consumer Price Index (CPI) rose 2.4% over the 12 months to March, while underlying inflation fell to 2.9%—its lowest level since December 2021. These figures place inflation within the RBA’s target range of 2–3%, giving the central bank room to ease policy.

RBA Governor Michele Bullock noted:

“We’ve come a long way, and it hasn’t been easy, but we have made good progress on bringing inflation down and keeping unemployment low. This is a good position for the economy to be in as we approach a period of uncertainty.”

What the Big Four Banks Are Saying

Chief economists from Australia’s major banks have weighed in on the decision and its implications:

• Sally Auld, Chief Economist at NAB, had anticipated a more aggressive move, stating prior to the decision that a 50 basis point cut was possible due to the rapid disinflation and global headwinds [1].

• CBA and Westpac now forecast the cash rate to fall to 3.35% by December 2025, with further cuts expected in the second half of the year [2].

• ANZ projects the same 3.35% level, but by August 2025, reflecting a slightly faster easing cycle [2].

These forecasts suggest a consensus that the RBA is entering a sustained period of monetary easing, aimed at supporting growth while inflation remains under control.

Property Market Outlook: Momentum Building

According to CoreLogic’s May 2025 Housing Market Update, national home values rose 0.7% over the past quarter, with the strongest growth seen in Brisbane and Adelaide, particularly in the lower quartile of the market [2].

Dr Nicola Powell, Chief of Research and Economics at Domain, commented:

“Our more expensive capital cities react quickly to rate cuts because they’re markets that are much more sensitive to changes in economic conditions. While affordability improves, first-home buyers may need to take on more debt to enter the market” [2].

Additional insights from realestate.com.au and Domain highlight:

• Outer suburban areas are outperforming inner-city markets due to affordability and lifestyle preferences.

• Investor activity is gradually returning, particularly in regions with strong rental yields.

• First-home buyer demand is expected to rise, supported by government incentives and improved borrowing conditions.

Government Support for Home Buyers

The federal government has expanded its Help to Buy scheme, allowing eligible buyers to purchase a home with as little as a 2% deposit, with the government contributing up to 40% equity—and no Lenders Mortgage Insurance (LMI) required.

Additionally, the First Home Guarantee will be extended from 2026, enabling first-time buyers to enter the market with a 5% deposit and no LMI.

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Final Thoughts

The RBA’s May rate cut to 3.85% marks a turning point for borrowers and the broader economy. With inflation easing, interest rates falling, and government support expanding, the conditions are aligning for renewed activity in the housing market.

If you're considering your next move, now is the time to act. Reach out to Toby and the team at WE Mortgage Solutions to explore how these changes could benefit you.