RBA Acts Again, Cuts Cash Rate to 3.85 Percent

The RBA Board said inflation had ‘fallen substantially’ from its 2022 peak, with higher interest rates helping bring demand and supply into better alignment.

A bike courier rides past the entrance to the Reserve Bank of Australia (RBA) in Sydney's central business district on April 2, 2013. Greg Wood/AFP via Getty Images

The Reserve Bank of Australia has lowered the official cash rate by 25 basis points to 3.85 percent, marking its second cut in 2025.

The move, in line with market expectations, follows February’s reduction—the first since November 2020—after rates were held at 4.35 percent for over a year.

In its monetary policy statement, the RBA Board said inflation had “fallen substantially” from its 2022 peak, with higher interest rates helping bring demand and supply into better alignment.

“Data on inflation for the March quarter provided further evidence that inflation continues to ease. At 2.9 percent, annual trimmed mean inflation was below 3 percent for the first time since 2021 and headline inflation, at 2.4 percent, remained within the target band of 2–3 percent,” the statement read.

While a minor uptick in headline inflation is expected due to temporary factors, the RBA now forecasts underlying inflation will hover around the midpoint of its target range for much of the forecast period.

Board Warns of Volatility Despite Rate Relief

However, the Board struck a cautious tone, warning of heightened global uncertainty and volatility in financial markets over the past three months.

The statement noted that recent tariff announcements had prompted a market rebound but added that, “There is still considerable uncertainty about the final scope of the tariffs and policy responses in other countries.”

Geopolitical tensions are also weighing on the global outlook.

“These developments are expected to have an adverse effect on global economic activity, particularly if households and firms delay expenditure pending greater clarity on the outlook,” they said.

The Board acknowledged that these global factors have dampened forecasts for growth, employment and inflation in Australia, adding that rapidly evolving trade policies make economic projections more uncertain.

Domestic Demand Lifts, But Challenges Remain

Domestically, the RBA observed signs of recovery in private demand. Real household incomes have improved, and indicators of financial stress have eased.

Yet, businesses in some industries are still struggling to pass on cost increases due to weak demand.

Labour market conditions remain tight, with employment rising and underutilisation rates staying low. Employers across several sectors continue to cite labour shortages as a constraint.

“More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the demand environment and weak productivity outcomes while conditions in the labour market remain tight,” the Board noted.

It concluded that inflation risks are now more balanced but cautioned that uncertainty remains high for both supply and demand.

“It nevertheless remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and supply.”

ANZ Sees More Cuts

The latest cut also follows sweeping trade measures introduced by former U.S. President Donald Trump, who imposed universal reciprocal tariffs, including a 10 percent levy on Australian imports.

In response, ANZ Bank in April had predicted three rate cuts this year.

“Given the likely impact of the tariffs on global growth, as well as those already evident on markets, ANZ Research expects the RBA to lower the official cash rate in May, July and August, by 25 basis points at each meeting. That would see the cash rate at 3.35 percent come August,” said Adam Boyton, head of Australian economics.

ANZ economists noted the tariff announcement was still being absorbed, and the coming weeks would shed light on potential negotiations and countermeasures.

“At a macro level, the U.S. does not buy particularly large amounts of Australian exports, although there may be sectoral impacts from tariffs. The bigger risks for the Australian economy centre around the implications for global growth and domestic consumer and business confidence,” they added.