RBA Cash Rate Forecast – What to Expect for the Rest of 2025

As we head into the second half of 2025, all eyes remain on the Reserve Bank of Australia (RBA) and the trajectory of its cash rate policy. Following an unprecedented tightening cycle from 2022 through 2023, the central bank has paused its rate hikes since late 2024, holding the official cash rate steady at 4.35%. The question now is: have we reached the peak, and when will we see the beginning of a rate-cutting cycle?

The Macroeconomic Landscape

The Australian economy has undergone a deliberate cooling phase. The RBA’s rapid interest rate hikes over the past two years were designed to combat persistent inflation, which peaked above 7% in 2022. These efforts have borne fruit, with headline inflation now down to 3.2%, edging closer to the RBA’s target band of 2–3%.

However, the tightening has had widespread consequences:

• GDP growth has slowed to an annualised pace of just 1.1%.

• Unemployment has ticked up to 4.4% as job growth slows in key sectors.

• Consumer sentiment remains weak, with households cautious amid rising living costs and mortgage stress.

• Business confidence is subdued, especially in retail, construction, and discretionary services.

While inflation is moderating, the central bank remains cautious—mindful of services inflation, global supply-side risks, and domestic wage pressures.

The RBA’s Guidance

Governor Michele Bullock has consistently emphasized a data-dependent and patient approach. While not ruling out further hikes, the rhetoric has notably shifted. In recent statements, the RBA has acknowledged “the balance of risks has shifted,” indicating that the next move is more likely a cut than a hike, provided inflation remains on a downward path.

Key data points the RBA is watching include:

• Core inflation, particularly in services and non-tradables

• Wage growth and enterprise bargaining agreements

• Labour market slack

• Global disinflation and Chinese economic activity

Market Consensus and Scenarios

Markets are pricing in at least one rate cut by December 2025, with many economists predicting a gradual easing cycle in the second half of the year.

Quarter	Expected Cash Rate	Market Outlook
Q2 2025	4.35% (unchanged)	Inflation still slightly above target; cautious wait-and-see.
Q3 2025	4.10% – 4.25%	Potential first rate cut, contingent on CPI dropping below 3%.
Q4 2025	3.85% – 4.00%	Gradual easing to support GDP growth and prevent overtightening.

Should inflation fall more quickly than expected—particularly if wage growth moderates or commodity prices drop—a faster pace of cuts is possible. Conversely, any re-acceleration in services inflation or external shocks (e.g. oil prices, geopolitics) could delay action.

What It Means for Borrowers and Investors

• Mortgage holders may see modest relief in monthly repayments later in the year.

• Businesses could access more favourable credit conditions, spurring investment.

• Property investors and developers may see improved feasibility on deals and development projects.

• Equity and fixed-income markets could respond positively to a dovish shift in policy stance.

Bottom Line

The RBA appears to be at the peak of its rate cycle, and while it's not ready to pivot just yet, the groundwork is being laid for a soft landing. Expect rates to remain on hold through mid-2025, followed by modest rate cuts beginning in Q3 or Q4—a welcome shift for households, property markets, and broader investment activity.