The Reserve Bank’s May decision to lower the cash rate to 3.85% signals growing confidence in inflation control, but experts say challenges remain for housing and lending sectors.
RBA’s 25 basis point rate cut was widely anticipated by economists and the market.
According to Westpac chief economist Luci Ellis (pictured upper left), the move reflects RBA’s growing confidence that inflation is back under control — though the path forward remains uncertain.
“This is a much less hawkish set of communication than February, or even April, and recalibrates the RBA away from its outlier view on the tightness of the domestic economy,” Ellis said.
She noted that with trimmed mean inflation running at 2.5% — the midpoint of RBA’s target — keeping the cash rate at clearly restrictive levels was no longer justified.
“The board has scope to cut further to support the economy should that become necessary,” Ellis said.
Westpac continues to forecast two additional rate cuts later this year, in August and November, which would bring the cash rate to 3.35%.
Finance professionals are backing RBA’s decision, saying it offers much-needed relief for mortgage holders and home buyers after a long tightening cycle.
“Borrowers will welcome this interest rate cut, as long as lenders reduce their variable rates by the full amount,” said Peter White (pictured upper right), managing director of the Finance Brokers Association of Australia (FBAA).
“A full reduction in the variable rate will also allow some who were not previously able to refinance (in mortgage prison) due to the serviceability buffer rate of 3%, to finally see some relief,” he said.
White urged borrowers to act.
“Our advice to existing borrowers is to ensure your bank passes on the full cut and if it does not, to contact them and ask for a rate reduction,” he said.
White also highlighted the benefit of broker advice: “Banks act in their own interests but brokers must by law act in the best interests of their customers.”
REA Group senior economist Eleanor Creagh (pictured lower left) said the rate cut would enhance buyer sentiment and support home price growth.
“Both buyer confidence and borrowing capacities will be buoyed as interest rates continue to fall, helping to drive demand and home price growth,” Creagh said.
She cautioned that affordability challenges persist despite relief.
“The rate cut offers some relief for borrowers, but affordability remains a challenge and sustained affordability improvements will depend on further reductions in the cash rate over time,” Creagh said.
Creagh also pointed to deeper supply-side issues.
“Population growth and a persistent undersupply of new housing continue to underpin prices,” she said.
Even with inflation easing, Creagh warned the broader economic outlook remains uncertain.
“The RBA reiterated that policy is not on a pre-set path and future moves will depend on incoming data,” she said.
“Trade tensions and volatility in global markets have escalated, reinforcing the need for caution and flexibility in setting policy.”
“While the direct impact on Australia may be smaller, the broader implications for global demand and financial conditions are being closely monitored.”
Ray White chief economist Nerida Conisbee (pictured lower right) said the RBA’s decision was made amid escalating global volatility but comes at a time when housing market resilience is already evident.
“The cut comes at a time when Australia's housing market is already demonstrating remarkable resilience,” Conisbee said. “April data confirmed the acceleration of price growth that began in January.
“[The] modest 0.25% cut will still direct additional money into the housing market, providing borrowers with increased capacity.
“Markets are now pricing in additional cuts through the remainder of the year, which will continue to support price growth. The impact will be particularly pronounced in markets that have already shown strong momentum, including Perth, Adelaide and Brisbane.”
However, she also noted that slower markets may respond more sharply to easing.
“Markets that are currently much slower, such as Sydney and Melbourne have historically been far more sensitive to rate cuts,” Conisbee said.
The Real Estate Institute of Queensland (REIQ) said the rate cut is crucial amid strong population growth and housing shortages.
“This cash rate cut is particularly critical for Queensland, where we’re experiencing above-average population growth and a pressing need for new housing construction,” said CEO Antonia Mercorella.
Mercorella highlighted the affordability benefits.
“Two rate cuts will also provide a boost to purchasing power – a single buyer on an average income could now afford around $20,000 more, while a dual-income household with two children could see an increase of approximately $30,000,” she said.
While the rate cut provides welcome short-term relief, CPA Australia’s Gavan Ord said it won’t solve Australia’s structural challenges.
The “decision will be met with a sigh of relief from households and businesses who have been counting on another rate cut to boost their cashflow,” Ord said.
“But rate cuts will not get Australia out of its productivity straitjacket. Significant reforms are needed to move the needle on economic growth.”
