Interest Rate interest

Interest rate interest is rising

Interest rate interest rose in the post-GFC ‘recovery’ process.  This was especially the case for those depending on interest income to fund/ subsidise their lifestyle.  Ultimately, the official (RBA) cash rate affects us all – savers and borrowers alike.

Most Australians took interest in what happened at the Reserve Bank of Australia (RBA) on the first Tuesday each month.  This has been particularly the case after economic shocks.  Events such as –

• the GFC (2008),
• the Covid19 pandemic (2019-2021), and more recently,
• global inflation and cost of living pressures – since 2023.

This schedule changed to a six-weekly cycle during 2024.  However, the determinations of the RBA on official inter-Bank cash interest rates affect us all.  For some of us it means that –

• deposit interest on savings and investments will move in a like manner; whilst for others,
• borrowing costs will be ‘similarly’ affected; and for all of us,
• that determination affects the flow of money in the economy.

Can we know which way interest rates will move next?

We recite the following pieces by a prominent Australian Economist.  These are not intended to embarrass him in any way.  Rather they demonstrate how difficult it is for even the experts to forecast interest rate movements with any certainty:

In December 2009, Craig James (Chief Economist at CommSec), presenting at the FinSIA Financial Services Conference made the following comment:

“A year from now the cash rate will most likely be around 4.50% – a level that will make the Reserve Bank much more comfortable. While a cash rate around 5% has been regarded as ‘neutral’ monetary policy setting in the past, this may prove too high if the Aussie dollar remains close to, or above, US90cents. A strong currency not only leads to lower prices of imported goods and lower inflation but it makes it tough for exporters and tourism.”
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In response to a question in relation to the impact of interest rates on investors, he is quoted as having commented –

“Around a third of people rent, a third of people own their own homes outright and a third are buying homes. …over time, the proportion of home owners with a mortgage has been rising. So the community is far more interest rate sensitive….; and – The Reserve Bank will continue to ‘normalise’ rate setting over 2010 – that is, lift rates to more ‘normal’ levels in line with more ‘normal’ economic conditions.”

As eventuated, RBA-set interest rates fell to their then lowest ever recorded level in August 2016, (1.50%). There were forecasts that this could fall to 1.00%.  At the nadir, our official rate fell to 0.15%

How does the determination of the Reserve Bank impact on the rates we are charged by our Banks? (Or consequently, that we receive on savings, from our Banks?)

As you may have observed, the interest cost on loans often increases by the amount of the RBA increase.  Unfortunately, these increases are often by an amount greater than their official increase.  Observations suggest that the credited interest rate on deposits rarely increases by an amount in excess of the ‘official’ increase.  It has also been observed that lenders have not all reduced interest on loans by an equivalent (or same) amount!

Strategic management of your interest rate costs

Has your interest rate interest been aroused? The experienced advisers at Continuum Financial Planners Pty Ltd advise clients to take particular care when considering ‘fixing’ interest rates.  In all cases, we strongly recommend that clients seek advice from us –

• before entering into any new mortgage or debt commitments; as well as
• in the event of any proposed variation to their debt structures.

Our process is ..’to listen (to your wishes and your needs), to understand (your capacity to manage the process to achieve your goals) and to have solutions (that will best serve your circumstances).’

To make an appointment with one of our advisers to discuss your strategic debt management and the consequence of interest rates from that –

• phone our office, on 07-3421 3456, or
• at your convenience, use the linked Book A Meeting facility.