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With a weak Australian dollar, many people assume an interest rate cut from the Reserve Bank of Australia is a good thing — especially for homeowners with mortgages.
However, the reality is the RBA cutting rates in the current economic climate could do more harm than good, with serious consequences for savers, retirees, renters, and the broader economy.
The weak Australian dollar and its consequences
The Australian dollar has been struggling for some time, trading weakly against the U.S. dollar. One of the key reasons for this is the sluggish outlook for the Australian economy. Our largest trading partner, China, is experiencing economic headwinds, including deflation and declining demand for commodities—an issue that directly affects Australia’s resource-driven economy.
Meanwhile, the U.S. economy is surging. Global markets are pricing in strong U.S. growth, while Australia’s outlook remains uncertain.
This discrepancy weakens the Australian dollar further, making imported goods and services more expensive for everyday Aussies.
A weak dollar has very real consequences. Fuel, groceries, clothing, cars, and even airfares all become more expensive because Australia imports so many goods. When the Aussie dollar weakens, inflationary pressures increase — making life harder for everyone, regardless of whether or not they have a mortgage.
Why interest rate cuts make things worse
A common assumption is lower interest rates provide relief to homeowners by reducing mortgage repayments. While this is true for those with loans, the broader economic impact of rate cuts is far more complex — and often negative.
1. Lower interest rates further weaken the Australian dollar
Interest rate cuts make the Oz dollar even weaker because investors move their money to countries with higher yields, such as the U.S. This further exacerbates the cost-of-living crisis, as imports become even more expensive.
2. Stock market instability
Markets react to interest rate cuts differently depending on the economic environment. In this case, when the RBA announced a rate reduction, the stock market fell by about 2.5% over the following trading days.
This indicates investor uncertainty and a lack of confidence in Oz’s economic direction.
3. Housing affordability worsens
While lower rates help existing homeowners, they push house prices higher by increasing borrowing capacity. This makes it even harder for first-home buyers to enter the market. Property prices are already a significant challenge for many and rate cuts only serve to widen the gap between those who own property and those who don’t.
4. Savers and retirees lose out
Not everyone has a mortgage. Only about one-third of Australians have home loans. Meanwhile, another third rent and the rest are either outright homeowners or retirees living off their savings.
Lower rates mean lower returns on savings accounts and investments like bonds, which hurts those who rely on interest income.
Retirees, in particular, will see reduced returns on their superannuation and investment portfolios, making it harder for them to maintain financial security.
Instead of rewarding those who have been financially responsible and saved for their future, rate cuts can penalise them.
5. Rents won’t go down
Some argue that lower interest rates could ease rental pressures, but history shows otherwise. Landlords typically pass on interest rate increases to renters but rarely, if ever, reduce rents when rates drop.
Instead, cuts boost property values, which makes investing in property more attractive and further inflates house prices — keeping renters locked out of homeownership.
A politically motivated move?
There’s also reason to believe that the latest rate cut may be politically motivated. With an election looming, governments often look for ways to provide short-term relief to voters.
While lower rates may give the illusion of economic support, they create longer-term problems that could lead to prolonged financial pain for many Australians.
The government should focus on addressing inflation properly — by cutting unnecessary spending and encouraging productivity — rather than relying on cuts that artificially inflate asset prices while eroding the dollar.
Optimism for the future
Despite the challenges, there is room for optimism. The Australian economy has weathered many storms before, and with the right policies in place, we can find a balance that supports both economic growth and financial security for all Australians.
However, interest rate cuts are not the solution — they are a short-term fix that ultimately makes the economic outlook worse.
If Australia is to thrive, we must focus on building a strong, stable economy with policies that support long-term prosperity rather than short-term political gains.
Andrew Baxter is an investment advisor, educator, commentator and author, recognised for his expertise in trading, wealth creation and money mindsets. He is the founder of Australian Investment Education, host of the Money and Investing podcast, and is author of The Wealth Playbook: Your Ultimate Guide to Financial Security.
Disclaimer: Wealth Magnet Pty Ltd (ABN 52 618 868 830) trading as Australian Investment Education is a Corporate Authorised Representative (CAR no. 1255231) of Grange Financial Services Pty Ltd (AFSL No. 488609).
The material provided in this article is for information only and should not be treated as investment advice. Viewers are encouraged to conduct their own research and consult with a certified financial advisor before making any investment decisions. For full disclaimer information, please click here.
