After living in a rising interest rate environment for the past few years, investors face a new climate: falling interest rates. 

This creates new risks and opportunities that investors should be aware of, either when monitoring their existing investments or considering new ones.

Where will interest rates go this year?

While the timing and degree of rate cuts for the rest of 2025 are still up for debate, experts agree that further rate cuts are on the horizon. 

On 18 February, the Reserve Bank of Australia (RBA) reduced the cash rate from 4.35% to 4.10%. This was the first change since November 2023 and the first cut since November 2020. 

​​This week, Treasurer Jim Chalmers said he was confident the economy had "turned the corner" in its battle against inflation. Treasury now expects underlying inflation (which excludes the more volatile food and energy components) to reach the RBA's 2% to 3% target by the middle of the year, six months ahead of previous expectations.

The RBA is set to meet on Tuesday to make its next interest rate decision. According to Yahoo Finance, all four big four banks are forecasting a hold, while the market has assigned an 8% chance of a cut. 

Three out of four big four banks believe the RBA will make its next move in May. Only Australia and New Zealand Banking Group Ltd (ASX: ANZ) believes the next rate cut will come in August.

Whichever forecast you believe, further rate cuts are likely to be around the corner. What does this mean for investors?

The winners

The consumer discretionary sector is a typical beneficiary of falling interest rates. Lower interest rates mean consumers have more disposable income to spend on goods and services, and ASX companies operating these businesses are well-positioned to benefit. 

This includes electronics retailers such as JB Hi-Fi Ltd (ASX: JBH) and Harvey Norman Ltd (ASX: HVN), as well as furniture retailers such as Nick Scali Ltd (ASX: NCK) and Temple and Webster Group Ltd (ASX: TPW). 

Another direct beneficiary of rate cuts is the real estate sector. Real estate companies typically have high debt levels, meaning interest repayments make up a large portion of expenses. When interest rates are lowered, expenses are lowered, too, boosting net profit. 

As my colleague Tristan wrote last week, high interest rates have been a challenge for real estate investment trusts (REITs) because they have increased the cost of financing (hurting net rental profits) and pushed down on asset values.

Scentre Group Ltd (ASX: SCG), which owns 42 Westfield shopping centres throughout Australia and New Zealand, uses a relatively high amount of debt to finance its investments. Lower rates are good news for Scentre Group and other REITs. 

Another likely beneficiary is PEXA Group Ltd (ASX: PXA), which processes around 90% of all property transactions settlements in Australia. Interest rate cuts could increase the volume of business for PEXA.  

The losers

On the flip side, certain sectors are likely to be negatively impacted by rate cuts. The big four banks will not do as well from their mortgage lending, with the net interest margin falling. Although its worth noting that this will be offset by less borrowers defaulting on their loans. Another sector that would prefer to see higher rates is insurance. Insurance brokers such as Steadfast Group Ltd (ASX: SDF) generate revenue through insurance broking fees and commissions. During high inflation (which is typically the cause of higher interest rates), insurance brokers enjoy strong pricing power and can benefit from higher premiums. This sets them apart from other businesses that cannot raise prices and must absorb higher expenses. When inflation moderates, this advantage disappears.

Similarly, companies in the consumer staples sectors such as Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) may underperform relative to the market. With more cash in their pockets, consumers may feel inclined to eat at restaurants more often instead of cooking at home.

Foolish takeaway

According to the big four banks, further interest rate cuts are on the horizon. While each business is impacted uniquely, certain sectors are generally more well-placed than others. Before rate cuts come into full force, it might be a good time to review your portfolio to see how it is likely to fare in a falling interest rate environment.