Interest rates – a double edged sword
On Melbourne Cup Day 2011,as tradespeople, shop workers, office staff and others downed tools for the Race That Stops a Nation, the Reserve Bank of Australia (RBA) made a monumental decision.
For the first time in 31 months, it reduced the cash rate by 25 basis points.
Not since April 2009 have Australians seen a rate decrease, and as expected, the announcement offered relief to home buyers. In the RBA’s words, “…overall conditions have remained tighter than normal, with borrowing rates still a little higher than average, credit growth subdued and asset prices lower than earlier in the year”.
In fact, the Westpac-Melbourne Institute Index of Consumer Sentiment immediately showed an increase in mortgage holders’ confidence.
Besides the obvious benefit to home buyers, history shows that interest rates affect the numbers of homes being bought and sold. When interest rates began to rise back in October 2009, transaction numbers began to fall in anticipation of further increases.
If the reverse holds true, as rates come down, the numbers of homes bought and sold could increase, and property, as any asset, responds to the pressures of supply and demand. This may translate into higher house prices – good for sellers, not so for buyers.
The news of the rate decrease gave retailers reason to smile. Even though Australian retail sales rose by 0.6% in the September quarter, the Australian Food and Grocery Council (AFGC) had predicted a “restrained” Christmas trading period for supermarkets and other stores. The rate cut injected optimism into a sector that has experienced its fair share of ups-and-downs.
Investors, however, should carefully weigh-up the RBA’s decision because when banks pass rate changes on to borrowers, they generally pass them on to savers as well. Most immediately affected will be those with term deposits and cash management trusts, and self-funded retirees with significant cash holdings.
Meanwhile, a reduction in cash rates often signals an increase in share prices, which is an indirect result of higher company profits. This bodes well for mum-and-dad shareholders and the stakeholders of businesses that have financed their operations.
Changes in interest rates are a double-edged sword, and any decisions you make in response to them must be in the context of your own investment goals. In such a climate, good advice is invaluable.
My Question to you is what will happen tomorrow, and how will that impact you???
This was forwarded to you by Andy Fenton
from http://morningtonfs.com.au
Financial Planning - superannuation
http://www.businessspectator.com.au/interest-rates Consumer-sentiment-surges-pd20111109
Commsec Economic Insight November 1, 2011-11-11
http://blog.rpdata.com 2011/07 Will higher interest rates affect the housing market?
