What falling interest rates mean to you

What falling interest rates mean to you

What falling interest rates mean to you

The cutting of Australia’s official interest rates by the Reserve Bank (RBA) this week makes us one of four countries with a cash rate of 1.5%.

Low as that is, there are 19 other countries with interest rates lower than Australia.

Four countries have a cash rate of between 1.0% and 1.35%, 12 between 0.0% and 0.75% and Japan, Sweden and Switzerland have interest rates of -0.10%, -0.50% and -0.75% respectively.

What negative interest rates mean

Negative interest rates penalise savers and reward borrowers.

As an example, saving (the equivalent of) $100,000 in Switzerland, costs $750 in interest over a 12 month period. So, one year on your investment would be worth only $99,250.

Conversely, you are paid interest of $750 over the year for borrowing $100,000.

This type of monetary policy is used in economies suffering under deflation (prices dropping) and is designed to encourage spending and investment to stimulate an economy, create jobs and bring inflation up to an optimal level. That optimal level in Australia is between two and three percent.

The Australian Economy

Earlier this week, while addressing the media about the Australian banks not passing on to consumers the full rate cut, the Prime Minister Malcolm Turnbull said, when asked what the rate cut said about our economy, that the RBA did the right thing cutting rates and should have done so sooner.

I agree that the RBA should have acted sooner and have been on record for the past few years saying that Australia’s interest rates have been out of step with those in other comparable countries.

The take outs from this include:

  • We live in Australia; and in a global economy
  • Our lives are impacted by both domestic and foreign policy
  • These are low inflationary times, and likely to stay that way for some years

Adjusting your strategy when conditions change

“The pessimist complains about the wind, the optimist expects it to change, but the leader adjusts the sails” (John Maxwell)

Does uncertainty about the future leave you fearful, without focus or a clear direction?

Something that will never change is the imperative, and responsibility, for you to have a financial plan forward; it’s simply not enough just to have a job and pay the bills.

As economic conditions change so too do we need to ‘adjust the sails’ of our plans. That is, take advantage of whatever prevailing winds are our present reality.

Don’t listen to doomsayers. They have always existed and will always be with us. And because they are so good at scaring people, they usually get the most spotlight in the media.

Equally, however, don’t ignore the winds of change. It is important to adjust our sails and capitalise on the opportunities that, like the doomsayers, are always with us.

In my book, ‘Property Investing in the Post GFC World’, I use the Sydney to Hobart Yacht race as an analogy.
Every year, on Boxing Day, ships sail out of Sydney Harbour and about four days later sail into Hobart Harbour.

The weather conditions differ greatly from one year to the next, as do the currents. Some years the wind blows from the South and others from the North.

You see, it’s not the conditions (circumstances) that determine outcomes but how we respond.

Now that you have read this you are going to respond in your own way, and that’s fine.

How can MRD help you?

For almost 15 years now MRD has been working with and supporting many hundreds of clients, from different backgrounds and with different circumstances… and through different economic cycles.

If you instinctively like the security of bricks and mortar and you would like help to devise an investment plan going forward; or perhaps you have a plan but the plan needs to be adjusted, then I strongly urge you to ‘speak up’.

To speak with us about your investment plans click >>>here and leave your best contact number and time(s). You can also call 1300 883 854 anytime and if it’s out of hours leave a message and we will come back to you promptly.

Have a great weekend and speak soon.

Partnering with you for your investment success,

Nick Lockhart