A Small Step for Rates, a Giant Step for Sentiment

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Now for the downhill run. After the most aggressive interest rate tightening cycle in modern history, we are finally moving past the peak. More central banks are now easing to stimulate their economies, with Australia finally joining the rate-cutting bandwagon in early 2025.

A small step for rates, a giant step for sentiment. As the economy moves to modestly lower rates, we expect to see a bigger shift in sentiment, with significant implications for the most rate-sensitive sectors, particularly consumer spending and housing construction.

Better construction feasibility. The building sector, long constrained by high material and borrowing costs, is set for a stronger outlook in 2025. Slower cost inflation and lower funding costs ahead should drive a clear turning point and rebound in building activity from here.

Some relief on affordability. For home buyers, higher mortgage rates have been a prominent factor behind the debilitating squeeze on housing affordability. Mortgage rates are falling in 2025, which should provide much-needed relief for financially-strained households.

What are the implications for credit? We see modestly lower rates in 2025 as a better sweet spot for private credit. While floating-rate interest repayments may edge slightly lower, we expect to see some offset from stronger borrower appetite and increased lending volumes.

Strategies for changing rates. For many asset classes, changes to the growth or rate regimes may drive big changes to the returns outlook. For commercial real estate debt, these regime changes are less relevant, given a long historical track record of stable returns.