We have returned to a time which on the face of it is reminiscent of late 2022 – potential of war escalation in geographies north of us, inflation showing potential of soaring, and rampant rhetoric of interest rate hikes! Yes this ‘panic’ is quite usual and expected – but is it a cycle or are we in unchartered waters?
When you look closer, today is not the same as 2022.
After COVID, interest rates were pushed to record lows. The RBA cash rate eased to 0.10%, supported by a fiscal stimulus of around $250 billion, or 15% of GDP. The RBA had signalled rates would stay on hold until 2024. At the same time, the global economy was recovering and inflation started rising faster than expected. The escalation of the Russian invasion of Ukraine added further pressure.
The response was swift and forceful. The cash rate lifted from 0.10% in April 2022 to 4.10% by June 2023, followed by another 0.25% rise in November to 4.35%. Even then, Australia did not reach the rate levels seen in some other developed economies. These increases were aimed at pulling inflation back under control and occurred during a period of relatively strong economic growth. Households proved more resilient than many expected, and debt was still comparatively cheap.
By 2024, expectations shifted. Major banks forecast rate cuts, with most tipping the cash rate to fall into the low 3% range by mid to late 2025. Those forecasts followed overseas markets and easing inflation toward the RBA’s 2% to 3% target range. In reality, rates did not move in 2024.
In 2025, the narrative changed again. We were told we were in a rate reduction cycle. Three cuts followed, despite core inflation not reaching the 2.5% midpoint. In my view, that was an overreaction, and inflation has since moved back above 3% (almost 4% annualised for the 1st quarter of 2026).
Where are we now?
Business and home loan rates are now around 6%. Profitability is under pressure and economic growth is weaker than it was in 2022. The rate rise last week has effectively unwound all of the 2025 cuts, which arguably should not have happened.
This time, inflation is being driven by external forces/supply shocks. War and broader economic conflict are the main drivers, rather than domestic stimulus, strong household spending or cheap debt. That distinction matters, because any rate move now flows directly into business and household cash flow by adding layers to already burdened cost structures.
Where to from here?
Over the medium to long term, markets tend to correct. Conditions usually normalise. For now, the focus is on controlling what you can control.
Australia still has a strong currency. If interest rates continue to rise, it could strengthen further.
Unsurprisingly, conversations about fixing interest rates have picked up. In some situations, for some borrowers, fixing can make sense.
At current levels, fixing often comes with a 60 to 80 basis point premium. At that cost, it is unlikely to provide an effective hedge over a two to three year term.
There is a risk to consider. If rates were to rise another 1% over that period, taking the cash rate to 5.10%, fixing may prove beneficial. That risk needs to be weighed carefully, case by case.
The key is understanding your position and making decisions that suit your business and cash flow.
For more information or to discuss your finance needs please call:
Clint Emslie
Consultant Finance & Advisory
0472 685 305