Why RBA moves don’t dictate stocks’ direction

Many say Reserve Bank of Australia (RBA) rate cuts are good for stocks and rate hikes are bad, based on headlines Fisher Investments Australia reviews. But when we examine the claim, we see little evidence central bank-set short rates have much lasting market impact.

As Exhibit 1 illustrates, rate decisions don’t dictate stocks’ direction. Take Australia’s last bear market and its rate hike cycle since 2020. In March 2020 alone, the RBA slashed rates twice for a half percentage point drop, from 0.75% to 0.25%, during pandemic lockdowns. But that didn’t prevent the ASX 200’s -36.5% price plunge.[i] COVID lockdowns—and their effect on earnings—drove that bear market. Corporate profits evaporated as Australian companies (and firms worldwide) had to shut down. Changing the Cash Rate Target didn’t alter this dynamic much—reopening did.

Exhibit 1: Australian Stocks Don’t Depend on RBA Rate Moves

Source: FactSet, as of 12/12/2025. S&P ASX 200 price index and RBA Cash Rate Target, 31/12/2019 – 12/12/2025.

Fast forward a couple years. When the RBA began raising rates in May 2022, stocks seemed to wobble—the ASX 200 fell as much as -15.3% from April to June as the Cash Rate lifted off from 0.1% to 0.85%.[ii] The impending and initial hikes—which were surprises, considering earlier guidance that most central banks didn’t plan to hike to counter inflation—were one of several negatives weighing on moods, which can heighten volatility and swing stocks. But such sentiment-driven moves occur for any or no reason. And they can’t be timed.

Indeed, with the RBA still hiking in June 2022, stocks’ correction ended without warning and the ASX 200 resumed climbing, albeit jaggedly. Why? When Fisher Investments Australia reviews the record, corporate earnings—and their outlook—kept improving despite the ongoing rise in rates. The hikes may have obscured that in the short term, but fundamentals matter more over the longer term.

This underscores another important point for investors: Don’t overrate monetary policy. Rate hikes and cuts generally have negligible effects on the overall economy and earnings. Hikes alone don’t necessarily squash growth, nor do cuts supercharge it. The RBA’s control over short-term interest rates is primarily transmitted to the economy by how they affect the yield curve—from overnight rates to market-set long-term rates 10 years or longer, in Fisher Investments Australia’s view. Banks borrow short term to fund longer-term loans, so the wider the gap, the more profitable lending likely is. Hence, when the gap grows (i.e., the yield curve steepens), lending tends to accelerate, as long as there is demand for it, as Exhibit 2 shows. Households and businesses spend and invest that money, helping drive economic growth.

Exhibit 2: Australia’s Yield Curve Influences Bank Lending

Source: FactSet, as of 12/12/2025. Australia 10-year government bond yield minus RBA Cash Rate Target (yield curve), January 2019 – November 2025, and Australian personal plus nonfinancial commercial bank lending, January 2019 – October 2025.

Note, though, that the yield curve is only a proxy for banks’ lending margins—it isn’t exact. Deposit rates Fisher Investments Australia reviews are often below the Cash Rate—which is the rate banks lend to one another. Banks can—and do—“borrow” from their customers for considerably less, which explains how negative yield curve spreads in 2023 and 2024 didn’t forestall overall loan growth.

Beyond this, Corporate Australia has other sources of credit besides banks, from global bond markets to nonbank private lenders. All this to say that the RBA’s rate decisions aren’t the be all, end all for controlling credit, much less the economy. As a lender of last resort, the RBA provides an important backstop for the banking (and wider financial) system—a monetary lifeline when people need it most. But its ability to influence economic activity isn’t close to the power many investors ascribe to it, according to Fisher Investments Australia.

So when you hear chatter rate moves will do this or that to markets, tune them down. More often than not, they are either overrated or misperceived. Whilst we don’t dismiss monetary policy error as a risk factor for stocks, Fisher Investments Australia’s reviews of market history suggest it is more nuanced, based on the yield curve overall and how it squares with popular sentiment over whether credit is too loose or too tight. And most likely, headline chatter focussed on a single move in a vacuum will probably miss that big picture.