What the 2026 Economic Outlook Means for Interest Rates

The beginning of 2026 has seen a lot of instability across the globe. The US has also experienced multiple Fed rate cuts total 175 basis points (1.75%) from the end of 2024 to now, with a Federal Funds Rate at approximately 3.50%-3.75%. These interest rate cuts are being used to coerce additional economic growth today, but also have the potential of increasing, (causing), future inflation.

Simultaneously with the above, US political and climate change have led to an overall weakening of the USD and a rise in US government bond yields (and subsequently, US borrowing costs). This is currently at its highest levels since 1999 (resulting from increased yields) due to the aforementioned shifts in the costs of the funding marketplace outside of the USA. Ultimately, leading to an increase in the overall cost of credit and a decrease in the credit availability for all companies/borrowers worldwide.

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Meanwhile, Australia’s economy still faces stubborn inflation. The latest data show trimmed mean inflation running around 3.4% – well above the RBA’s 2–3% target. The good news is that some key price pressures (like rents and new housing construction costs) are starting to ease. A brighter sign is the strong Australian dollar: it recently hit about US70c. A higher Aussie dollar helps keep a lid on the cost of imported goods, which should help slow inflation’s rise. In practical terms, this means that everyday borrowers benefit from somewhat cheaper overseas goods and fuel, and lenders can pass on a bit of relief.

Interest Rates and Borrowing Costs

All this matters directly to borrowing. With the US cutting rates while we’re still above target in Australia, interest-rate spreads have widened. In Australia, official rates are around 3.6%, and many lenders are watching the data for signs of any RBA cuts. Even if rates start to fall here later in 2026, the timing is uncertain. In the meantime, higher bond yields globally are raising funding costs for banks, which can translate into higher loan rates here. That means it pays to be cautious: every borrower should build in a repayment buffer, not assume rates will stay low forever.

Impact That Borrowers Need to Understand

• Owner-occupiers: Your borrowing power might change if lenders tighten or if rates rise. Focus on finding the best loan structure, not just the lowest sticker rate. For example, consider splitting your loan, and make sure you have an offset or savings buffer. This gives you flexibility if rates jump. And remember, when prices are rising but interest costs are high, even a small rate increase can squeeze thin budgets. Stay conservative with your budget and build extra repayment room.

• Refinancers: It’s a great time to review any existing loan. Lenders have cut rates unevenly since late 2024, so some borrowers have better deals than others. If your current loan rate is higher than the market average, shopping around could save you thousands. Ask Financials can help run a formal refinance review. Our refinance consultants (for example, in Bentleigh) focus on lowering repayments or accessing equity. We’ll highlight when a rate cut hasn’t been passed on, and help you lock in a better offer. In short, a targeted refinance strategy now can boost your savings if done right.

Staying Prepared

In this environment, knowledge and planning are everything. At Ask Financials, we guide buyers and investors through the noise. Ready to make your move? For tailored advice or to discuss your buying strategy, contact Ask Financials today. Call us at +61 433 944 055 or book a free consultation to start your plan.

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