RBA cuts rates for first time in four years – What happens now?

For the first time in more than four years, the Reserve Bank of Australia (RBA) has cut interest rates. 

The cash rate dropped by 0.25 percentage points in February, lowering it to 4.1% and providing long-awaited relief for businesses and households.

The drop is a sign that we may have finally reached a turning point after an extended period of high borrowing costs and financial strain. The interest rate now is just slightly higher than our 50-year average of 3.86% – nowhere near as high as 17.5% seen in 1990, or as low as 0.1% in 2020. 

While the interest rate cut is very welcome, it shouldn't make us complacent. Lower interest rates will help reduce higher mortgage payments for mortgage holders and mean lower repayments for businesses with loans, which should free up some cash flow. Yet one rate cut doesn't fix all economic challenges, and we could see inflation battles continue if consumer spending reignites.

In the broader economic landscape, the Productivity Commission has highlighted that productivity growth remains sluggish, and the RBA notes ongoing uncertainty. Global concerns like trade tensions continue to impact our economy, making it harder for business owners to plan confidently.   

Business owners: Now is the time to strengthen your financial strategy

For business owners, this rate cut presents an opportunity to reassess financial strategies. Instead of viewing it as an excuse to take unnecessary risks, consider it a chance to stabilise and optimise your operations. 

You could: 

Review business loans and debt strategies

• If you have business loans, this could be a good time to refinance or pay down debt faster while rates are lower.

Invest wisely

• If you've been holding off on expansion plans, now might be the time to explore strategic investments. Just make sure the growth aligns with your long term objectives.

Improve efficiency

• Use this breathing space to assess costs, streamline operations, and boost productivity.

Stay proactive with customers

• If consumer confidence rises, position your business to capture demand by refining your customer experience and marketing efforts.

Individuals: Make the most of the breathing room

For home owners and individuals, a lower interest rate means potential savings on mortgage repayments. 

Rather than splurging, consider these clever moves:

Keep repayments steady

• If you can afford to, maintain your previous repayment amounts. This will help you pay off your mortgage faster and save on interest in the long run.

Build a financial buffer

• Use this opportunity to add to savings or offset accounts to safeguard against future rate increases or other economic impacts.

Reassess your financial strategy

• Whether it's investing, superannuation contributions or reducing personal debt, now is a great time to refine your financial strategy.

Thinking ahead strategically

While the RBA’s rate cut is a sign that tough times are easing, it doesn’t mean we’re in the clear. Inflation, housing affordability, and economic uncertainty still pose challenges and more must be done to address these issues. 

For businesses and individuals though, this is a moment to be both optimistic and pragmatic. The pressure may be easing, but financial resilience remains key.

Now is the time to reinforce good habits, make strategic moves, and prepare for whatever comes next.

FOR MORE INFORMATION

For help to make the most of this opportunity and set yourself up for success, request a free financial health check from your local RSM office.