The downside to rate cuts? Incomes slashed, says InvestSMART

The latest Australian Prudential Regulation Authority (APRA) data has resulted in concerns over the impact of predicted interest rate cuts on Australians who rely on household deposits and cash savings for income.

The data indicated that household deposits held by Australian banks grew to $1.571 trillion in January 2025, up from $1.542 trillion in October 2024, as Australians have capitalised on high deposit rates as a result of recent interest rate increases.

However, banks have reduced deposit rates as sentiment has pivoted towards monetary easing by the Reserve Bank of Australia (RBA), leaving household incomes relying on cash savings and deposits slashed.

Digital wealth and advice platform and exchange traded fund (ETF) provider, InvestSMART, said if the RBA goes ahead with an expected rate cut at its next Board meeting on 18 February, the “trend” of lowering deposit rates will quickly gather steam.

“While rate cuts may provide a financial lifeline for some home loan borrowers, lower rates may prove limiting for the many Australians who rely on cash deposits as a regular source of income – this includes the 32% of Australian home owners who don’t have a mortgage, and the nation’s 4.2 million retirees,” Ron Hodge, CEO of InvestSMART Group, said.

“The hunt for higher returns may see retirees and savers forced back into ‘risk on’ assets that come with higher levels of risk than they may be comfortable with, or investment terms that don’t suit their personal cash needs.”

InvestSMART highlighted ETFs as an option to maintain a “steady, structured process of moving up the risk curve as rates move lower” by shifting maturing term deposit funds into low-cost, efficient funds.

“A typical conservative ETF portfolio, with 70% cash and bonds and 30% property and equities would have returned around 7% last year, with 3.4% of that being returns to investors as income,” Hodge said.

“This can be the ideal portfolio for deposit-reliant investors to meet their income needs – without too much uplift in risk, when we move into the RBA’s rate cutting cycle.

“Investors can then adjust their allocation of funds towards each of these asset classes to suit their own life stage, interest rate cycles and market conditions.

“We know that ETFs are especially popular with younger generations of investors, notably Gen Z and Millennials. But a lower rate environment may be the pivotal turning point that sees older generations embrace the flexibility, wealth of choice, and low cost returns that ETFs can provide.”