The question on every Australian mortgage holder’s mind in 2025 is this: how many interest rate cuts can we expect this year?
The RBA delivered a welcome 25-basis point cut on 20 May, bringing the cash rate down from 4.10% to 3.85%. That followed another cut in February.
However, predicting further movements remains challenging. The path forward depends heavily on a complex interplay of economic data, both domestic and international.
The RBA will meet a further six times this year. The May meeting was a pivotal one, confirming economists’ and market expectations for a second rate cut.
While the reality is it’s impossible to accurately predict all future cash rate movements, the economic data continues to provide useful insights.
Key factors influencing the rate cut
The RBA’s primary objective is to keep inflation within its target band of 2-3%. RBA Governor Michele Bullock has repeatedly emphasised this goal: “sustainably returning inflation to target within a reasonable time frame remains the Board’s highest priority.”
But inflation isn’t the only factor that carries weight when it comes to the cash rate. The RBA also considers economic growth, employment data, consumer spending, consumer sentiment, and international economic conditions.
Here’s what the latest figures tell us:
- Consumer sentiment: The Westpac–Melbourne Institute Consumer Sentiment Index recorded a modest rise of 2.2% to 92.1 in May, showing early signs of stabilisation. Similarly, the ANZ-Roy Morgan Consumer Confidence index increased to 88.8 as of 20 May, likely in anticipation of the RBA’s decision.
- Consumer spending: The Visa Australia Spending Momentum Index jumped a remarkable 7.8 points in April to 106.4, reaching above 100 in all states and territories for the first time since May 2021, indicating strengthening spending momentum. Latest ABS data for January 2025 showed household spending on services rose by 1.5% and total household spending increased by 0.4%.
- Unemployment: The job market has remained resilient. Australia’s unemployment rate was steady at 4.1% in April 2025. Employment rose by 89,000 in April, and the participation rate increased to a three-month high of 67.1%. While the labour market remains tight, the RBA judged that an easing in monetary policy was appropriate given the inflation outlook.
- International economic conditions: Developments in major economies, particularly China and the United States, continue to influence Australia’s economic outlook. While trade tensions have recently risen, their direct impact on timely domestic indicators has been modest, though the global outlook remains more uncertain than usual.
Economists’ predictions and the outcome
Many economists had forecast a 0.25 percentage point cut to the cash rate in May. With the inflation data returning to target, the pressure on the RBA for a rate cut had intensified. Financial markets, as indicated by ASX data, had suggested a strong likelihood of a rate cut. The RBA’s decision in May confirmed these expectations.
As for future cuts, economists, commentators and markets expect further cuts, but the expected number is unknown.
The impacts of a rate cut
Now that the RBA has cut rates, borrowers can anticipate some relief.
Multiple cuts would, of course, increase these savings. Beyond immediate repayment reductions, rate cuts can also improve borrowing capacity for prospective homebuyers and those looking to refinance.
The pros and cons of a rate cut
An interest rate cut offers a mixed bag of potential outcomes. For mortgage holders, it provides much-needed relief from rising repayments, easing pressure on household budgets. For businesses, lower interest rates can stimulate investment and boost consumer spending, which in turn supports economic growth.
However, a significant drawback of rate cuts is their potential to exacerbate the housing affordability crisis. Lower interest rates can increase demand for housing, potentially driving up property prices and making it even more difficult for first-home buyers to enter the market.
Options if you’re still concerned
Even with a rate cut, or if you’re already struggling with your mortgage repayments, there are several options you can consider:
- Extending your loan term: Spreading your repayments over a longer period can reduce your monthly outgoings, although it will result in paying more interest overall.
- Switching to an interest-only loan: This option allows you to pay only the interest on your loan for a set period, providing temporary relief. However, you’ll need to resume principal and interest repayments eventually.
- Refinancing with a new lender: Different lenders offer varying interest rates and loan features. Refinancing can potentially secure you a better deal, particularly as lenders often offer more competitive rates to attract new customers.
- Chat to your mortgage broker: Your mortgage broker can review your current rate, as banks are often open to reviewing rates within one to two years of the loan being taken out. They can also help explore other options tailored to your situation.
- Consult a financial planner: A financial planner can discuss strategies like debt recycling, helping you explore ways to create more tax-effective debt and improve your overall financial position.
The verdict
The RBA’s decision to cut the cash rate in May provides a clear indication of its assessment of the economic landscape and its commitment to bringing inflation sustainably within target. While predicting further precise timing and extent of any future reductions remains uncertain, the initial cut offers tangible relief for many. The truth is, pinpointing the exact timing and number of future rate movements is incredibly difficult, especially with the current global landscape and evolving economic data.
What we do know is that Australia remains a relatively safe and consistent economy, with a stable property market and a recently elected majority government providing stability. Governments are generally keen to protect consumers and prevent mass repossessions, so they will always look for ways to counter excessive interest rate rises.
For mortgage holders, staying informed about economic developments and exploring available options is crucial in navigating the current interest rate environment. Whether further rate cuts materialise or not, it’s essential to proactively manage your mortgage and ensure it aligns with your financial goals. Working with your mortgage broker to ensure your rate remains competitive is always a good idea.
Reviewing your increased borrowing capacity
If you would like to know your options or how much extra you can borrow following the interest rates cuts, reach out to Fabe Financial for a no-obligation chat today.