Negative Gap Explained: Impact on Australian Finance in 2025

Negative gap isn’t just financial jargon—it’s a real-world concept that can shape the fortunes of banks, borrowers, and investors across Australia. With interest rates in flux and the Reserve Bank of Australia (RBA) signalling a more cautious approach in 2025, understanding the implications of a negative gap is more important than ever.

What Is a Negative Gap?

In finance, a negative gap refers to the difference between a bank’s rate-sensitive assets and its rate-sensitive liabilities. If a bank has more liabilities (like deposits) repricing or maturing sooner than its assets (like loans), it faces a negative gap. In practical terms, when interest rates rise, the cost of funds for the bank increases faster than the income it earns from lending, which squeezes its margins.

• Assets: Loans and investments that earn interest
• Liabilities: Deposits and borrowings on which the bank pays interest

Imagine a typical Australian bank with $2 billion in variable-rate home loans (assets) and $2.5 billion in at-call deposits (liabilities). If the RBA hikes rates, the cost of those deposits goes up immediately, but many home loans might be fixed or take longer to reprice, creating a negative gap.

Why Does the Negative Gap Matter in 2025?

2025 is shaping up to be a pivotal year for Australian finance. Following a period of aggressive rate hikes in 2022–2023, the RBA has adopted a ‘wait-and-see’ stance amid global uncertainty and persistent inflation. Australian banks, which traditionally relied on net interest margins for profitability, are now grappling with the risks a negative gap presents:

• Margin Compression: As deposit rates rise faster than loan yields, bank profits shrink.
• Loan Pricing Pressure: Banks may be forced to lift mortgage rates or tighten lending criteria.
• Market Volatility: Investors and shareholders could see more earnings volatility in bank stocks.

The negative gap isn’t just an abstract risk. In early 2025, several major lenders flagged narrowing margins in their half-year results, citing intense competition for deposits and slower repricing of their loan books. This has prompted a renewed focus on asset-liability management (ALM) across the sector.

Implications for Borrowers, Savers, and Investors

The ripple effects of a negative gap extend well beyond bank boardrooms. Here’s how different Australians may be affected:

Banks & Lenders

• May become more conservative in lending, especially for riskier or longer-term loans
• Could increase fees or introduce new products to offset squeezed margins
• Heightened focus on hedging interest rate risk and diversifying funding sources

Borrowers

• Could face tighter lending standards, especially for fixed-rate or interest-only loans
• Potential for higher variable-rate loan costs if banks attempt to rebuild margins
• Greater importance of shopping around for competitive rates and flexible loan features

Savers & Investors

• Deposit rates may rise as banks compete for funding, benefiting savers
• Bank shares could experience more volatility as investors watch profit margins
• Term deposits and high-interest savings accounts may become more attractive relative to riskier assets

For example, in April 2025, several challenger banks increased their online saver rates to over 5% p.a., spurring a mini deposit war and drawing billions in new household funds. Meanwhile, major banks have quietly trimmed cash-back offers on home loans to preserve profitability.

How Australians Can Navigate a Negative Gap Environment

Whether you’re a borrower, saver, or investor, there are practical steps to navigate the challenges and opportunities of a negative gap:

• Borrowers: Lock in fixed-rate deals if you’re concerned about rising variable rates, but weigh break fees and flexibility.
• Savers: Compare deposit products regularly—smaller banks may offer better rates in a bid to shore up funding.
• Investors: Scrutinise bank earnings for signs of margin pressure, and diversify your portfolio to manage volatility.

On the policy front, the Australian Prudential Regulation Authority (APRA) has emphasised in its 2025 guidance the importance of robust ALM frameworks. This includes stress testing for rate shocks and ensuring banks have ample liquidity to withstand funding cost spikes.

Conclusion: Staying Ahead of the Curve

The negative gap is more than a technical term—it’s a signal of shifting tides in Australian banking and personal finance. As interest rate dynamics evolve in 2025, understanding how a negative gap affects banks, borrowers, and savers can help you make smarter financial decisions. Stay alert to market trends, review your lending and investment options, and keep an eye on how your bank is managing its balance sheet.