• Should you do anything about rising interest rates?

  • Jun 14 2022
  • Length: 15 mins
  • Podcast
Should you do anything about rising interest rates? cover art

Should you do anything about rising interest rates?

Listen for free

View show details

  • Summary

  • Some investors have been spooked by the RBA hiking interest rates by 0.75% over the past two months, particularly since it has spent the past two years telling us that rates would not rise until 2024. Higher interest rates at the same time as rising prices (inflation) are a two-fold blow for household budgets. Where are interest rates heading? The banks predict that the cash rate will rise by a further 1.40% to 1.50% by March 2023. Money markets have priced in a cash rate that is more than 2.60% higher by March 2023, but most commentators feel this is too hawkish, and unlikely to happen. The theory is that, due to higher inflation, the cash rate should return to the neutral rate as soon as possible to avoid monetary policy adding to inflationary pressures. The neutral rate is when the cash rate is neither economically expansionary nor contractionary. Most commentators believe the neutral rate is between 2% and 3%. Ironically, inflation may force rates to fall again Australian inflation is currently 5.1% p.a. and will certainly read higher in the June quarter. Inflation in other developed economies is approaching 10%. But anyone that's visited a supermarket or petrol station lately knows that inflation is a lot higher than what the CPI measure reflects. This higher inflation has already dampened consumer and business confidence, which will cool economic growth (GDP). The neutral cash rate might very well be between 2% and 3% when prices of goods and services are at normal levels. However, given the backdrop of much higher prices, it is very likely that the natural rate is closer to 1% to 1.5%. Therefore, if the RBA raises rates too far at the same time prices are very high, it will result in a decline of economic growth (GDP). In fact, last week CBA forecasted that will happen and the RBA will cut rates by 0.50% in the second half of 2023. Don't overreact to recent rate rises I was watching TV with amusement last week. Reporters were interviewing people about the RBA's recent 0.50% rate hike. People were talking like interest rates were 10%! Of course, I shouldn't be surprised at the alarmist nature of TV! The reality is that interest rates are still very low by historical standards. By the end of this month (i.e., after the most recent rate hike filters through to mortgage rates), standard variable home loan (P&I) rates will be around 4.75% p.a. and investment (IO) rates approximately 6.10% p.a. Of course, new borrowers are offered hefty discounts of 2% p.a. or more off the standard variable rate. Therefore, most discounted home loan rates will be in the high 2%'s to low 3%'s. The average standard variable rate over the past 20 years was 6.36% p.a. according to RBA data. And 20 years ago, the average interest rate discount was only 0.70% p.a., so the actual average discounted rate would be closer to 5.50% p.a. Therefore, even if the RBA hikes rates by 1.40-1.50% as the banks expected, standard variable interest rates will still be about 1% below the long-term average. Avoid fixed rates for now The fixed rates that the banks offer customers are dependent upon the banks cost of funds e.g., how much it costs them to borrow for 3 years. Given that the interest rate curve is unrealistically steep, which makes borrowing more expensive for the banks', fixed rates are financially unattractive. For example, 3-year fixed rates are high 4%'s and 5-year fixed rates are typically above 5% p.a. Two things may occur over the next year that will put...
    Show More Show Less
Show More Show Less

What listeners say about Should you do anything about rising interest rates?

Average Customer Ratings

Reviews - Please select the tabs below to change the source of reviews.

Audible.com.au reviews

Amazon Reviews
No Reviews are Available
In the spirit of reconciliation, Audible acknowledges the Traditional Custodians of country throughout Australia and their connections to land, sea and community. We pay our respect to their elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples today.