Last week, as widely anticipated, the Reserve Bank of Australia (RBA) elected to leave interest rates on hold at 3.6%.
This decision was made primarily because progress on reducing inflation has slowed
Attention then turned to the timing and magnitude of future rate cuts.
Over the past few months, investors have been positioning their portfolios for a sharp decline in interest rates.
Consumer discretionary stocks such as Wesfarmers Ltd (ASX: WES) and JB Hi-Fi Ltd (ASX: JBH) have soared 28% and 50% for the year to date. Both stocks recently hit new record highs, as investors prepared for further rate cuts.
However, the RBA's post-meeting commentary dampened these hopes.
As reported by The Australian, former RBA insider, HSBC chief economist Paul Bloxham, commented that the RBA's language had shifted in recent weeks:
In February, it cut but was hawkish; in April it held steady and was hawkish; in May it cut and was dovish, with talk of a possible 50 basis point cut.
Image source: Getty Images
Will there be another interest rate cut this year?
According to The Australian, following last week's interest rate call, the market is now pricing a 40% chance of a November rate cut. That's significantly lower than two weeks ago, when the market had assigned it a 76% chance.
Additionally, just one out of the big four banks believes there will be another interest rate cut this year.
Westpac Banking Corp (ASX: WBC) is expecting another rate cut in November 2025 , followed by two more in February 2026 and May 2025.
However, in a 30 September note, Westpac Chief Economist Luci Ellis acknowledged that this trajectory was far from certain.
Ellis wrote:
The post-meeting statement was notably cautious and non-committal about the outlook. It also flagged that the MPB would review the outlook (as well as the risks, as in the language in August) in light of the incoming data.
Commonwealth Bank of Australia (ASX: CBA) and ANZ Group Holdings Ltd (ASX: ANZ) expect the next rate cut to be delivered in February 2026.
Meanwhile, National Australia Bank Ltd (ASX: NAB) has projected the RBA to deliver its next rate cut in May 2026.
How should investors respond?
Long-term investors shouldn't be too phased by experts' shifting interest rate projections.
As investors have experienced this year, the macroeconomic environment is dynamic, and conditions can change at any point.
The RBA can also surprise the market. This was experienced in July when the cash rate was left on hold, going against almost every expert's prediction for a rate cut.
Regardless of the macroeconomic outlook, those with a high allocation to consumer discretionary stocks may wish to diversify into other sectors.
Over the past week, several of my colleagues have profiled ASX companies outside the consumer discretionary sector with significant potential upside.
On 4 October, The Motley Fool's Bart Bogacz covered the silver price's recent strong performance and named several options to gain exposure to silver through ASX shares.
Today, The Motley Fool's Tristan Harrison covered ASX small-cap financials stock L1 Group Ltd (ASX: L1G), a recent addition to the ASX following the merger/acquisition of Platinum Asset Management.
