Interest Rates, Property & The Economy – February 2025
Welcome to 2025! The Reserve Bank of Australia (RBA) has delivered its first decision of the year, cutting the official cash rate by 0.25% to 4.10%. This marks the first rate cut since 2020 and sets the stage for an interesting year ahead in finance, property, and economic policy.
Between May 2022 and November 2023, the Reserve Bank of Australia (RBA) implemented 13 consecutive interest rate increases, raising the cash rate from 0.10% to 4.35%. Throughout 2024, the RBA maintained this rate, with no changes during the year. In February 2025, the RBA enacted its first rate cut since 2020, reducing the cash rate by 0.25% to 4.10%.
A Long-Awaited Shift
Money markets had anticipated a strong likelihood of this cut, given inflation slowed to a better-than-expected 3.2%. While the decision was largely expected, it was likely a much closer call than many assume. The RBA will have been watching international markets closely—particularly the US, where rate cuts began last September. However, inflationary pressures are already re-emerging in the US, something the RBA will want to avoid here in Australia.
Impact on Mortgage Holders & Property Market
The key question now is: how will lenders respond? Borrowers will be watching closely to see whether this rate cut translates into lower mortgage rates and, more importantly, how many more cuts may follow. The property market has remained resilient despite the higher-rate environment of the past two years, and this move may inject renewed confidence into buyers and investors.
A lower cash rate typically supports property prices as borrowing costs decrease. However, with inflation still above the RBA's target range of 2% to 3%, any further adjustments will be made cautiously. Currently, inflation sits at 3.2%, above the midpoint target of 2.5%, which means the RBA will remain vigilant in its approach to monetary policy. For investors, developers, and homeowners alike, the months ahead will be crucial in determining whether this rate cut signals a broader easing cycle or simply a measured adjustment.
Tariffs, Trade & Economic Uncertainty
Beyond interest rates, global economic factors remain highly influential. The US is currently engaged in trade disputes, focusing on domestic production in steel, aluminium, and other industries. While Australia may avoid direct impacts by negotiating exemptions, any slowdown in Chinese demand—our largest trading partner—could have ripple effects on the Australian economy.
The US remains Australia’s 5th largest export partner, accounting for less than 5% of total trade, whereas China dominates at over 40%. Any disruption in China’s economy, whether from trade tensions or internal economic shifts, could impact Australia’s resource sector, which underpins much of our economic stability.
RBA’s Position – Cautious but Focused
The RBA has made it clear that despite the rate cut, it remains committed to bringing inflation back within its target range. The bank’s December 2024 commentary reinforced this stance:
"Underlying inflation remains too high. Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. Measures of underlying inflation are around 3.5%, which is still some way from the 2.5% midpoint of the inflation target."
The RBA remains firm that it will take whatever measures necessary to maintain economic stability. While politicians and media outlets may push for more aggressive rate cuts, the RBA’s priority remains inflation control.
Looking Ahead
With the first rate cut of the year behind us, the focus now shifts to how lenders, borrowers, and markets react. Will mortgage rates follow suit? Will this move spark renewed activity in the property sector? And most importantly, will inflation remain under control to allow further cuts in 2025?
As always, financial markets, investors, and property professionals should keep a close eye on economic indicators and RBA commentary. This year is shaping up to be pivotal, and staying informed will be key to navigating the evolving landscape.
Stay tuned—2025 is just getting started!