Understanding Interest Rate Cycles: When to Lock In Your Rate

The Interest Rate Cycle

Interest rates don't stay constant - they move through predictable cycles driven by economic conditions and central bank policy. Understanding these cycles helps you time your term deposits.

The Four Phases

• Rising rates: RBA increasing cash rate, deposit rates climbing
• Peak rates: Rates at cycle highs, best time to lock in long terms
• Falling rates: RBA cutting, deposit rates declining
• Trough rates: Rates at cycle lows, use short terms

Where Are We Now? (2025)

Current indicators suggest we're at or near peak rates:

• RBA has paused rate increases
• Inflation trending toward target range
• Deposit rates at 8-year highs
• Economists forecasting cuts in late 2025

Strategy at Different Cycle Points

At Rate Peaks (Now)

• Lock in longer terms (3-5 years)
• Maximise funds in term deposits
• Consider extending existing deposits

When Rates Are Falling

• Maintain existing long-term deposits
• Avoid breaking early despite lower new rates
• New funds into medium terms

At Rate Troughs

• Use shorter terms (6-12 months)
• Maintain flexibility for rate recovery
• Don't lock in low rates for years

Historical Context

Looking at recent history:

• 2019-2021: Trough - rates fell to 0.5-1.5%
• 2022-2023: Rising - rapid increases
• 2024-2025: Peak - rates at 7-8.5%
• 2025-2026: Likely falling phase ahead

The Opportunity Cost of Waiting

Trying to perfectly time the peak often backfires. Every month you wait earning lower rates costs money. A good rate today beats a theoretical better rate tomorrow.

Current rates are exceptional by historical standards. The prudent move is to lock in now rather than gamble on further increases.