Fast inhibitory neurotransmission in the brain is largely mediated by the -aminobutyric acid-type A (GABA-A) receptor. The 3,5-reduced neurosteroids (e.g. allopregnanolone) are the most potent endogenous modulators of the GABA-A receptor. While it is known that 3,5-reduced neurosteroid levels change during stress or depression, and over the estrus cycle, a basic physiological role consistent with their pharmacological action remains elusive. We used the unique architecture of the auditory midbrain to reveal a role for 3,5-reduced neurosteroids in regulating inhibitory efficacy. After blocking the massive GABA-ergic projection from the dorsal nucleus of the lateral lemniscus (DNLL) to the contralateral central nucleus of the inferior colliculus (ICC) in anesthetized rats, a reactive increase in the efficacy of other inhibitory circuits in the ICC (separable because of the dominant ear that drives each circuit) was demonstrated with physiological measures: single-neuron activity and a neural-population-evoked response. This effect was prevented by blocking 3,5-reduced neurosteroid synthesis with a 5-reductase inhibitor: finasteride. Immunohistochemistry confirmed that the DNLL blockade induced an increase in 3,5-reduced neurosteroids in the contralateral ICC. This study shows that when GABA-ergic inhibition is reduced, the brain compensates within minutes by locally increasing synthesis of neurosteroids, thereby balancing excitatory and inhibitory inputs in complex neural circuits.