Optimism about interest rate cuts could be dangerously misplaced, according to ASX Trader

Optimism about short-lived interest rate cuts could be dangerously misplaced with signs pointing to late-stage firefighting as the economy cracks, rather than recovers. Homeowners should brace for rates of 7-8 per cent, writes ASX Trader.

For months, the market narrative has been simple: “Rate cuts are coming… and markets are going to fly.”

It’s a comforting idea. After all, who doesn’t want cheaper money and rising asset prices? But the reality is far more complex and if history is any guide, this optimism could prove dangerously misplaced.

When rate cuts didn’t save us

Two of the biggest market crashes in history occurred right after rate cuts.

• January 2001: The US Federal Reserve cut rates. The dot-com bubble burst.

• December 2007: Another round of cuts. The Global Financial Crisis erupted.

In both cases, rate cuts weren’t the start of recovery.

They were late-stage firefighting as the economy cracked.

It’s the central bank equivalent of a closing-down sale: the discounts are real, but they signal trouble, not opportunity.

Healthy sale vs Desperate sale

Think of rate cuts like a shop running a sale.

• Healthy Sale: The shop is thriving, but offers a discount to attract even more customers. Positive sign.

• Closing-Down Sale: The shop is struggling, shelves are full, and liquidation is the only option. Negative sign.

Both are “sales,” but the reasons are very different.

The same applies to central banks: a rate cut can signal strength or desperation.

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Australia's housing market has reacted to interest rate cuts, rising to new record highs.

The historical pattern of rate cuts

Here’s where history offers clarity:

• Insurance Cuts (Green Periods):

When rate cuts came early, before a recession had fully taken hold, then markets often rallied.

o Early 1990s

o Late 1990s

o Post-2020 pandemic shock

These cuts were proactive, designed to stabilise growth and reassure investors.

Equities responded strongly, and in more recent cycles, so did Bitcoin.

• Reactive Cuts (Red Periods):

When cuts came late, after bubbles burst or recessions were under way then markets initially sold off.

o Early 1980s (Volcker’s inflation battle)

o Early 2000s (dot-com bust)

o 2008 GFC

These cuts were reactive, addressing crises already in motion. Investor confidence lagged, and markets only stabilised once the broader economy healed.

The pattern is clear: early, pre-emptive easing supports rallies; late, reactive cuts often coincide with downturns.

Early easing supports rallies, reactive cuts coincide with downturns.

The inflation question they haven’t answered

Here’s the uncomfortable truth: central banks have NEVER truly solved inflation on the first attempt.

After the fastest rate hiking cycle in history and following the greatest wave of money printing ever, should we believe they’ve solved it now?

Highly unlikely.

Inflation has a habit of flaring back up, particularly when liquidity is reintroduced too quickly. That’s why gold is pumping: markets are already hedging against the risk of inflation’s return.

Bonds move the world

Most people were blindsided by the sharp rate hikes in 2022. But they shouldn’t have been. The charts were already showing what was coming.

Bonds gave the warning.

Yields and bond prices move in opposite directions. When bond yields rise, borrowing costs surge, risk assets struggle, and central banks are forced to respond.

That’s why traders say: “Bonds move the world.”

The Australian 10-year yield (AU10Y) has now broken a 40-year downtrend which is a monumental shift that signals the end of the cheap-money era. If yields hold this trajectory, inflation risk is far from dead.

ASX Trader graph, Sep 22 2025.

What happens next?

Yes, we will see a handful of rate cuts, markets are pricing them in. But if history is any guide, these won’t be the start of a new bull market driven by free liquidity.

They’ll be reactive cuts, designed to put out fires that are already burning.

And when those flames of inflation reignite as gold’s strength suggests they will, we’ll likely take out new highs on interest rates.

The takeaway

The effectiveness of rate cuts has always depended on timing and context.

• Early, pre-emptive cuts can steady markets and spark rallies.

• Late, crisis-driven cuts often coincide with sell-offs.

So when the next round of cuts arrives, investors must ask: Are these healthy “insurance cuts” or desperate “closing-down sales”?

If central banks haven’t truly solved inflation and history suggests they haven’t, the next move may catch the majority off guard. Because the real driver isn’t the Fed, the RBA, or the headlines. It’s the bond market. And the bond market is telling us we’re entering a new regime.

And here’s the practical reality for everyday Australians: don’t buy a home you can’t afford unless you can handle repayments at 7–8 per cent. That may sound extreme, but it’s not.

In fact, that’s around the long-term average. Ask your parents or grandparents as they were paying 17 per cent in the 1980s. Rates don’t stay low forever. To ignore that lesson is to gamble with your financial future.

Originally published as Optimism about interest rate cuts could be dangerously misplaced, according to ASX Trader