The interest rate question advisers should be asking right now

Most investors are focused on whether the Reserve Bank of Australia (RBA) will hike again. Emanuel Datt, chief investment officer of Melbourne-based fund manager Datt Capital, thinks that is the wrong question entirely.

For Datt, RBA interest rate duration, not the direction of the next move, is what should be driving portfolio decisions right now.

Why 2026 is nothing like 2011

The cash rate is back at levels last seen in late 2011, a comparison that gets made often and misread just as often.

In 2011, the RBA was in an easing cycle. Households and businesses had a credible expectation of relief ahead. Today, the direction is reversed. Market pricing points toward 4.7 per cent by year end, with no cuts anticipated until 2028.

Datt is clear about what that means in practice: businesses and households are not pricing in relief; they are stress-testing against the possibility of more restriction.

“Whether the RBA hikes again is not the primary investment question. Markets have largely priced in further tightening. The more important question is duration: how long does the cash rate stay at or above 4.35 per cent?”

That difference in expectation changes behaviour in ways that a simple rate comparison cannot capture. Australian household debt to gross domestic product (GDP) reached approximately 113.7 per cent in mid-2025. The mortgage balances being repriced today are far larger than in 2011, even at equivalent rates, because property prices have risen substantially over the past 15 years.

Housing costs rose 6.5 per cent year-on-year to March 2026 and electricity prices are up 25 per cent as government rebates roll off. Roy Morgan modelling puts mortgage stress at 1.6 million Australians, roughly 30 per cent of all borrowers, following the May rate hike.

“Household consumption is expected to take a hit from weaker real incomes as higher prices erode spending power,” Datt says. “This is not a brief tightening correction but a prolonged period of restrictive policy operating against a structurally constrained economy.”

What to own and what to avoid

Against that backdrop, Datt is focused on one core distinction: businesses that can absorb a sustained high RBA interest rate duration environment versus those whose earnings depend on cheap credit or consumer spending.

The businesses best placed share a few common traits. Low debt relative to earnings. High interest cover ratios. Pricing power that allows them to pass through input costs without losing volume. Energy producers and gold-linked businesses benefit directly from the inflationary conditions driving rates higher. Defensive industrials and essential services with contracted revenue streams carry structural insulation.

The businesses to be cautious about are equally clear. Highly geared companies rolling over debt at materially higher rates. Consumer discretionary businesses exposed to household spending compression. Companies with thin margins in competitive industries where pricing power is limited.

Small-cap companies warrant particular scrutiny. “While the segment contains businesses with strong earnings quality, the cohort as a whole carries higher refinancing risk and is more sensitive to credit tightening than large-cap peers,” Datt says.

How to position a portfolio for a prolonged cycle

Datt’s portfolio thinking follows the same logic. In fixed income, floating-rate exposure is favoured over long-duration instruments. In equities, quality earnings should take precedence over growth narratives that require continued multiple expansion.

Understanding RBA interest rate duration is especially critical for investors in or approaching retirement. “The depth and timing of drawdowns should matter as much as average returns,” Datt says. “A capital preservation approach focused on risk-adjusted returns becomes more important than ever as the cycle extends.”

Diversification across asset classes and geographies also becomes more valuable in a period of domestic stagflation risk. In normal cycles, correlation assumptions between asset classes tend to hold reasonably well. In the environment Datt is describing, they do not.

Reframing the rate conversation with clients

The rate debate will continue. But Datt’s argument is that advisers and investors who stay focused on whether the RBA moves again are missing the more consequential question.

In a cycle defined by RBA interest rate duration rather than direction, the businesses and portfolios built to last the distance will look very different from those built for a rate cut that may still be years away.

Clients are already feeling it in their mortgages, their power bills and their weekly shop. The advisers who reframe the conversation around duration, quality earnings and capital preservation, rather than waiting for rate relief, will be the ones their clients remember when the cycle finally turns.