What Falling Interest Rates in Australia Mean for the Economy & Investors
Wednesday, May 21, 2025
Australia is entering a new phase of monetary policy as the Reserve Bank of Australia (RBA) has begun cutting interest rates in 2025, with the official cash rate now at 3.85% (May 20205) after two reductions this year.
This shift marks a significant change after several years of rate hikes, and it brings both opportunities and challenges for households, businesses, and especially retirees relying on fixed-income investments.
Why Are Interest Rates Being Reduced?
The RBA’s decision to lower rates is primarily driven by easing inflation, slower economic growth, and reduced wage pressures. After aggressively raising rates from 0.10% in 2022 to 4.35% by late 2023 to control inflation, the central bank now sees price pressures moderating. With inflation moving closer to the RBA’s 2–3% target range, the focus has shifted to supporting economic growth and ensuring stability. Global trends also play a role, as rate cuts by the US Federal Reserve and other central banks put downward pressure on Australian rates to keep the currency stable and maintain competitiveness.
Anticipated Benefits for the Economy
Lower interest rates are designed to stimulate the economy in several ways:
Boosting Consumer Spending: Cheaper borrowing costs mean lower mortgage repayments, freeing up disposable income and encouraging households to spend more.
Encouraging Business Investment: Lower rates reduce the cost of capital, making it more attractive for businesses to invest and expand.
Supporting Asset Prices: Reduced rates often lead to higher share prices, increasing household wealth and further supporting consumption.
Stabilizing the Housing Market: More affordable loans can help underpin property values and increase activity in the real estate sector.
These effects are expected to help offset the drag from global economic uncertainty and ensure Australia’s recovery remains on track.
The Downside: Falling Income from Term Deposits
While borrowers and investors in growth assets may benefit, the outlook is less rosy for savers and retirees who are investing in conservative areas such as term deposits. As banks respond to RBA cuts, term deposit rates have been dropping steadily, with the average three-year term deposit rate falling to 3.6% in September 2024, down from 4% at the start of the year. With inflation at 3.8%, many term deposits are now yielding less than the cost-of-living increases, eroding purchasing power.
For retirees relying on term deposit interest to fund their lifestyle, this can mean a significant income shortfall. For example, a couple with $500,000 in term deposits earning 5% would receive $25,000 per year, but if rates fall to 4%, that income drops to $20,000—potentially leaving a gap for retirement income and living expenses in general.
What Can Retirement Investors Do?
With term deposit returns under pressure, retirees and conservative investors may need to look beyond traditional cash products to generate sufficient income.
Managed investments can be a viable alternative to term deposits in a low-interest rate environment, particularly for retirees seeking higher income. Unlike term deposits, which offer fixed interest rates and are generally considered lower risk, managed funds pool investors’ money and invest across a range of asset classes such as shares, bonds, property trusts, fixed income funds and cash. This diversification can help reduce the risk associated with any single investment and potentially deliver higher returns over the long term
Managed funds also offer greater flexibility—investors can usually access their money more easily than with term deposits, and they can add to their investment at any time. Most managed funds pay regular income distributions, which can be reinvested or taken as cash, providing a potential income stream that may outpace term deposit rates, especially when rates are falling.
For retirees willing to accept some additional risk in exchange for potentially higher income, managed investments can play a valuable role in a diversified portfolio, helping to offset the impact of declining term deposit rates and maintain their desired standard of living.
As always, seeking professional investment planning advice is recommended to ensure there is a balanced approach within your retirement investment strategy, ensuring it aligns with your personal goals and risk tolerance. Maher Digby Securities are experts in retirement investment strategies and estate planning and offer a complimentary initial consultation.
For more Information contact Mark Digby at Maher Digby Securities Pty Ltd - Financial Advisers – AFSL No. 230559. This document was prepared without taking into account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such. Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor.