Mortgage relief for millions as RBA cuts interest rates but don’t expect much more

Some of the big banks are lowering home loan rates faster than others after the RBA cut interest rates by 0.25 percentage points, in a move welcomed by millions of borrowers.

Mortgage interest rate cuts are on the minds of millions. Picture: iStock

Tuesday’s interest rate cut by the Reserve Bank of Australia will be welcomed by millions of borrowers, but people shouldn’t get too excited about future relief.

The 0.25 percentage point cash rate reduction is the second rate cut following 13 rises since the RBA began lifting rates in 2022.

Reserve Bank governor Michele Bullock said the cash rate cut, which was expected by economists, came amid “uncertainties about the outlook for domestic economic activity and inflation stemming from both domestic and international developments”.

“Geopolitical uncertainties also remain pronounced. 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,” she said.

NAB became the first of the big four banks to cut its variable home loan rates, announcing it will decrease its standard variable home loan interest rate by 0.25 per cent p.a., effective from Friday 30 May 2025. The other majors followed cutting their variable loans by 0.25 per cent p.a, with ANZ and CBA joining NAB in delivering the cut to customers on May 30. Westpac will delay passing on the 0.25 per cent p.a cut until June 3.

Macquarie Bank is heating up competition in the mortgage market, confirming it will pass the 0.25 per cent rate cut to customers on May 23.

“We know homeowners across Australia are watching rate movements closely and that every dollar counts. That’s why we’re reducing the time it takes for this rate cut to be effective from 10 days to three so our customers can feel the benefit of lower rates, and more money in their pockets at the end of each month, sooner,” said Ben Perham, Macquarie Bank head of personal banking.

For those hoping for a return to pre-pandemic interest rate levels however, factors firing up inflation – including a big-spending Labor government, low unemployment and solid wages growth – may thwart the RBA from further rate cuts.

It’s worth analysing the recent history of rate rises and cuts to see where we are likely to be heading.

When Covid caused the RBA to cut rates five years ago, borrowers were already benefiting from an ultra-low cash rate – 0.75 per cent, which translated to mortgage rates below 3 per cent. The RBA cut another three times in 2020 to bring the cash rate to an emergency low 0.1 per cent and home loans closer to 2 per cent.

The current cash rate sits at 4.1 per cent and home loan rates near 6 per cent.

The key reason why there’s no chance of them getting back to pre-Covid levels for many years is because inflation is, and will be, too high to allow it.

Aussies enjoyed low interest rates in the lead-up to 2020 because Consumer Price Index inflation sat below 2 per cent for almost all of the five-year period preceding the pandemic.

The RBA uses the cash rate as a blunt tool to keep inflation within its target band of 2-3 per cent, which it sees is important for a strong and stable economy.

So because inflation was below 2 per cent, home loan and business borrowers enjoyed low interest rates.

Inflation has been above 2 per cent for the past four years, peaking at 7.8 per cent in late 2022, and currently sits at 2.4 per cent. The RBA aggressive rate rises in 2022 and 2023, which raised mortgage repayment costs by more than 60 per cent, did the job of reversing the surge.

But getting it below 2 per cent appears highly unlikely any time soon because of:

• Government spending that continues to grow, pushing national debt above $1 trillion and throwing more money into the economy to fuel further inflation.

• Solid wages growth of 3.4 per cent – or 3.6 per cent for public servants – and that follows some much bigger recent wage rises in areas such as aged care, health and education.

• A continuing low unemployment rate of 4.1 per cent, which has surprised economists by staying low despite cost-of-living pressures, small businesses struggling and economic growth effectively going backwards.

• Weak productivity, so our higher wages are not resulting in a more productive and richer economy. Per capita economic growth has been sliding backwards for most of the past few years.

The RBA uses the cash rate as a blunt tool to keep inflation within its target band of 2-3 per cent.

So what does it all mean for personal and business borrowers battling higher-for-longer rates and repayments?

Firstly, while the RBA is widely tipped to cut again in August this year, and some say once more before December, don’t plan for it. The RBA will be prudent.

Remember that in the past three years Australians have handled surging rates and soaring living costs, and are still here. Both are now coming down, and Tuesday’s 0.25 percentage point cut reduces monthly repayments on a $750,000 mortgage by $114.

Anything is possible in global finance and geopolitics in the coming years with Donald Trump in charge of the world’s biggest economy. A big global shock – in any form – could result in quick changes in economies and interest rates.

The wild ride continues, just not with ultra-low interest rates.

Originally published as Mortgage relief for millions as RBA cuts interest rates but don’t expect much more