Betting Against the Bearish Tide: Why Australia's Credit Pulse Signals a Rate Cut Opportunity

The Australian economy is bracing for a slowdown, with bond markets pricing in three rate cuts by early 2026. Yet beneath the surface, a contrarian opportunity is emerging: despite May's modest 0.5% monthly credit growth, the data reveals a turning point for monetary policy. For investors willing to challenge pessimism, the fading inflationary pressures and resilient SME sector suggest a strategic pivot toward interest-rate-sensitive assets is warranted.

The Credit Growth Paradox: Slowdown or Soft Landing?

The May credit aggregates show total growth at 6.9% annually—a deceleration from earlier peaks but still robust. Housing credit grew 5.8% year-on-year, while business lending surged 9.5%, outpacing both households and the broader economy. This divergence hints at a structural shift: businesses are borrowing aggressively to expand, even as households pare back debt.

Crucially, the RBA's focus on inflation targets now aligns with these trends. With trimmed mean inflation at 2.9%—within its 2–3% target—the central bank has room to cut rates further. The May 2025 cash rate reduction to 3.85% was just the start. Bond markets anticipate three more cuts by February 2026, but the RBA's next move hinges on whether credit demand can sustain growth without reigniting price pressures.

Historical Patterns: Credit Growth and Inflation's Dance

The data reveals a clear cycle: credit booms often precede inflation spikes, but the relationship is not linear. From 2020 to 2023, credit growth (especially in housing) fueled goods inflation, peaking at 7.8% in late 2022. By mid-2025, however, the correlation has weakened. Business credit—now excluding speculative warehouse trusts—has become the key driver, while housing demand has moderated.

This shift matters. Businesses reinvesting in transport, renewables, and manufacturing are less inflationary than housing speculation. Meanwhile, falling energy prices (electricity costs dropped 25% in late 2024) and stabilized service-sector inflation (now 3.7%) have created a “soft landing” scenario. The RBA's next move is no longer about taming inflation but sustaining growth—a dovish pivot that benefits rate-sensitive sectors.

SME Resilience: The Unseen Anchor

Skeptics argue that SME fragility could derail this scenario. Yet the data tells a different story. While insolvency rates rose to 0.5% in 2024—near the top of pre-pandemic norms—most failures involved small firms in cyclical sectors like construction. Critically, these businesses had minimal debt, limiting systemic risks.

SME cash buffers remain 20% above 2010s averages, and leverage ratios are near historic lows. Even in retail, where challenges persist, operating losses (20% of small businesses) mirror pre-pandemic norms. This resilience suggests the economy is less vulnerable to a sharp downturn than markets fear.

The Contrarian Playbook: Positioning for Rate Cuts

The market's bearishness is overdone. If the RBA cuts rates further, these sectors will benefit:

1. Financials (Banks, Insurers):
   Lower rates reduce mortgage arrears risks while boosting loan demand. The S&P/ASX 200 Financials Index has underperformed broader markets since 2022—despite banks' strong capitalization.

2. Housing and Construction:
   With housing credit growth steady and construction loans rising, developers and materials firms (e.g., BlueScope Steel, James Hardie) could rebound.

3. Consumer Discretionary:
   Lower borrowing costs could reignite spending in travel, autos, and home improvement—sectors where SMEs dominate.

Risks and Reality Checks

Bearish arguments focus on global trade tensions and weak wage growth. Yet wage CPI (1.8% in Q1 2025) aligns with inflation moderation, reducing pressure on the RBA to hike. Even if U.S. tariffs disrupt exports, the SME-heavy services sector is domestically oriented and less exposed.

Conclusion: The Tide Is Turning

The May credit data isn't a sign of weakness—it's a signal. With inflation under control and businesses leading the charge, the RBA's next move will likely be easing, not tightening. For contrarians, now is the time to buy into financials and housing before the market catches up. The pessimism is misplaced; the real risk is missing the rally.

Investors who bet on this shift today may find themselves on the right side of the next cycle—one where credit moderation and rate cuts fuel, rather than hinder, recovery.