The Fundamental Misconception
When it comes to Australian interest rates, most financial commentators, mortgage brokers, and media sources get it wrong. They fixate on RBA meetings, cash rate announcements, and domestic economic indicators. But these aren’t the primary drivers of what you actually pay on your mortgage or earn on your savings.
The real story is different. Australian interest rates are predominantly driven by US rates and wholesale funding markets, with the RBA often playing catch-up to what’s already happened in the market.
The Evidence Is Clear
Our analysis of rate movements between 2020-2025 tells the story plainly:
The data shows Australian rates follow US rates with a predictable lag – typically 2-3 months, but sometimes as long as 5 months as we saw in the recent cutting cycle. Australian banks adjust their lending rates based on US funding costs first, with the RBA cash rate often following market reality rather than leading it.
How Bank Funding Actually Works
To understand this, you need to know what “funding” actually means for banks.
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Banks don’t just use customer deposits to make loans. Australian banks get around 30-40% of their funding from wholesale markets – basically borrowing money to lend out. If a bank needs $100 to lend, about $60-70 comes from deposits, and $30-40 comes from these wholesale funding markets.
Critically, about two-thirds of this wholesale funding (roughly 20% of total funding) comes from offshore markets, predominantly in US dollars. Australian banks borrow these US dollars and convert them to Australian dollars through currency swaps.
When US interest rates change, the cost of this wholesale funding changes immediately. Banks must adjust their lending rates to maintain margins, regardless of what the RBA is doing. The RBA eventually moves the cash rate to align with what’s already happening in markets.
Three Phases That Tell The Story
Looking at interest rates from 2020-2025, we can see this relationship play out in three distinct phases:
1. Pandemic Emergency (March 2020 – Early 2022)
When COVID hit, both central banks slashed rates in emergency moves. The Fed cut to near-zero, and the RBA followed, creating temporary alignment between the rates. During this unusual period, the differential was minimal at just -0.15%.
What’s telling, Australian lending rates fell before many RBA announcements as banks responded to collapsing US funding costs.
2. US Aggressive Hiking (March 2022 – Late 2023)
As inflation surged, the US raised rates more aggressively than Australia. The Fed hiked faster and higher, pushing the differential to -1.4% by late 2022.
What’s telling: Australian mortgage rates started climbing well before RBA hikes as banks’ US dollar funding costs surged.
3. The 2024 Margin Squeeze
This period reveals everything about who’s really in charge of Australian rates. From September to December 2024, US rates fell by 1.0% while the RBA held steady. The differential narrowed from -1.15% to just -0.15%.
This created havoc for Australian banks. Their US funding costs were dropping, but they faced multiple pressures:
- They’d locked in higher wholesale funding based on expectations of rates staying elevated
- The RBA’s low-cost Term Funding Facility had just matured in mid-2024
- Fierce competition for mortgages kept lending rates lower than they wanted
- Deposit competition remained intense
The result? Australian banks’ net interest margins got squeezed to pre-pandemic levels despite the high-rate environment. Their profits fell, with ANZ reporting an 8% decline, NAB 6.1%, Westpac 3%, and Commonwealth Bank 6%.
The crucial insight: Australian bank lending rates were responding to US funding costs and competitive pressures, not RBA decisions. The RBA was a spectator, not a driver.
The Recent Cutting Cycle Confirms It
The latest cutting cycle proves this relationship conclusively:
- US began cutting in September 2024
- Australian bank funding costs started declining immediately
- Fixed mortgage rates began drifting lower within weeks
- The RBA finally cut in February 2025 – a full 5 months later
The RBA wasn’t leading; it was following what had already happened in funding markets.
What This Means For You
Understanding this reality gives you a significant advantage:
For Borrowers
Stop waiting for RBA announcements. Watch US Federal Reserve decisions and swap rates instead. They’ll tell you where Australian mortgage rates are heading 3-6 months before the RBA moves. When US rates start falling, fixed mortgage rates in Australia will follow within weeks, regardless of RBA rhetoric.
For Investors
US rate movements are your leading indicator for Australian financial conditions. The 2-3 year swap rates show what the market thinks the average cash rate will be over that period – this drives fixed rate pricing more than RBA forecasts.
For Financial Professionals
Your clients need to understand this reality. Build your advice framework around US rate cycles and swap rates rather than RBA speculation. The professionals who understood this in 2024 positioned their clients months ahead of those waiting for RBA signals.
The Bottom Line
The RBA cash rate isn’t the cause of Australian lending rate movements – it’s often the effect. The true driver is US rates and the wholesale funding markets that determine what it costs Australian banks to lend money.
To truly understand where Australian rates are headed, look to America first. The rest will follow.
This analysis is based on interest rate data from 2020-2025, reflecting patterns observed across multiple cycles. While domestic conditions matter, the structural dependence on US funding markets creates a relationship that fundamentally shapes Australian interest rates.