The Reserve Bank of Australia (RBA) officially delivered its first interest rate cut in February 2025, reducing the cash rate from 4.35% to 4.10%. This long-anticipated move signals the start of a new economic cycle, as the central bank responds to cooling inflation and a softer labour market. With more cuts expected throughout the year, the impact on borrowers, savers, investors, and the broader economy will be significant.
While homeowners and businesses may find relief in lower borrowing costs, savers could see declining returns on deposits. Meanwhile, share and property markets are already adjusting to this new monetary environment. Here’s what the rate cut could mean for different asset classes and financial decisions in the months ahead.
Shares
Interest rate cuts generally provide a tailwind for equity markets, benefiting growth-oriented assets such as stocks. However, markets often anticipate rate changes in advance, meaning some of the potential gains may have already been factored in. While lower interest rates can support company earnings and encourage investment, they also indicate a weaker economic environment, which can have mixed effects on stock performance.
Some sectors tend to benefit more than others. Property, infrastructure, and businesses reliant on long-term bond rates often see a positive impact. Consumer-focused industries may also receive a boost as lower rates put more disposable income in the hands of consumers. The lower Australian dollar that typically accompanies rate cuts can benefit companies with international exposure, while banks have historically seen gains in such an environment.
Bonds
Bond markets typically perform well when interest rates fall, as bond prices move inversely to yields. In the short term, falling rates increase the value of existing bonds. However, if rates decline too far, bonds may become less attractive to investors. External factors, such as global economic policies and geopolitical developments, can also influence bond market performance, creating additional complexity in this rate-cut cycle.
Property
While lower interest rates generally support property prices, expectations for a surge in home values may be overstated. Despite reduced mortgage costs, housing affordability remains a challenge, particularly in high-priced markets like Sydney. The overall economic environment, including employment trends, will play a crucial role in determining property market movements. With signs of a market slowdown emerging in late 2024, price growth in 2025 may be more subdued than in previous years.
The Australian Dollar
Falling interest rates typically lead to a weaker Australian dollar, making exports more competitive but increasing costs for imported goods. The Australian dollar’s performance is also influenced by global interest rate trends and commodity prices. Investors with exposure to the US market may need to consider currency hedging strategies, as exchange rate movements could affect returns in the coming years.
Fixed Interest
For savers, rate cuts bring lower returns on deposits. High-yield term deposits that were available in late 2024 have already started to disappear, and savings account rates are declining. The most competitive term deposit rates now range from 5.15%* for a six-month term to 4.7%* for a two-year term. Banks often adjust their rates in anticipation of central bank decisions, meaning deposit rates could continue to decline as further cuts are expected.
Borrowers
Borrowers stand to benefit the most from lower interest rates, with mortgage costs decreasing as banks pass on the rate cuts. Many mortgage holders had been relying on this reduction to ease repayment pressures. Fixed mortgage rates have already dropped, with some lenders offering three-year fixed rates as low as 4.99%*. Further cuts could provide additional relief for borrowers throughout the year.
Looking ahead
With inflation continuing to decline and the labour market showing signs of softening, further rate cuts are anticipated throughout 2025. The RBA is expected to proceed cautiously, balancing the need to support economic growth while preventing a resurgence of inflationary pressures. As financial conditions shift, individuals and businesses must assess the impact on their financial plans and investment choices. While lower interest rates create new opportunities, they also introduce risks, especially in an economic environment that may be slowing. Adapting financial strategies in response to these changes will be essential in the months ahead.
Now is the time to reach out for professional advice from a qualified Accountant and Financial Adviser – smart choices today, financial freedom tomorrow!
* Interest Rates current at time of publication.
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