Short answer: not much.
With much trepidation, an unconvincing RBA succumbed to pressure and delivered its first rate cut since November 2020, lowering the cash rate from 4.35% to 4.10%. The big question now – was this the start of a longer easing cycle or a one-and-done cut?
How did interest rates react?
Short-term rates, which are heavily influenced by domestic factors including the RBA, adjusted lower as expected. The 1- and 3-month BBSW (Bank Bill Swap Rates) dropped, and major banks passed the full RBA cut onto variable-rate borrowers.
Longer-term rates (5+ years), which take their cues more from US markets than the RBA, actually moved higher. Why? Persistent, structural inflation remains a concern. The 10-year Australian Dollar interest rate swap has hovered around 4.50% for two years, tracking closely with US 10-year Treasury yields. Unless a financial shock forces a rethink, markets expect these levels to hold steady.
Borrowers at a Crossroad
There are two schools of thought on where interest rates go from here:
- The Optimists: Those betting on further cuts, aligned with the RBA’s ambitious forecast of a terminal cash rate of 3.50% by the end of 2026, and
- Everyone Else: Those worried, rightly in our opinion, that there is a real chance that inflation starts rising again – just as it did in the US after the Federal Reserve cut rates in 2024 and inflation started climbing again from 2.4% in September 2024 to 3.00% in January 2025.
For borrowers, the inverted yield curve presents an opportunity. With 3-year fixed rates of 3.90% sitting below short-term rates, locking in is a bet each way – securing immediate interest cost savings (effectively locking in a future RBA cut now) while protecting against the risk that interest rates need increase to combat inflation.
Now’s a good time to assess your interest rate strategy and position for what will be an uncertain environment ahead. As one borrower commented “there are too many risks in my life, why make interest rates another one.”
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