Rate changes create winners and losers
1 Dec 2009
Have you noticed how we’re being bombarded with economics-related data? All kinds of rates and indices are being served up to us every day in the mainstream media. Some of these finance-related statistics have been around for a while, like the ANZ’s monthly job ad series, or the Consumer Price Index, but they’ve largely gone unnoticed unless something newsworthy could be interpreted from the data. Now, thanks largely to the media frenzy that surrounded the so-called global financial crisis, we’re given daily or monthly updates on everything from the exchange rate for our dollar, to the price of a barrel of oil and even the inflation rate.
One of the indicators that’s rarely out of the spotlight these days is interest rates, or to use the Reserve Bank of Australia’s formal description, the official cash rates. The RBA’s monthly announcement about interest rates has become a key part of the media cycle. At the beginning of every month we all hold our breaths as RBA Governor, Glenn Stevens steps up to the microphone and asks, “Can I have the envelope please?” He gives an overview about the state of the economy and how this has influenced this month’s decision about rates – whether it’s going up, coming down or staying on hold for another month.
Interest rates can always be expected to be on the move but at least we’re unlikely to be facing the prospect of rates climbing back up to around 17% as we saw in early 1990. Last month we had our first rate increase in 19 months and this was followed by another rise this week. Given the turnaround in the economy since the dark days of 2008 and comments from the RBA Governor himself, it now looks likely that more increases will follow.
As in most things financial, whenever there’s a rate change, there are ‘winners’ and ‘losers’. Higher interest rates mean higher mortgage, investment loan or credit card repayments for some people. Businesses also feel the pinch as it costs them more to service their loans. Anyone with cash on deposit usually benefits from a rate rise, assuming the bank passes it on. Self-funded retirees are one of the main beneficiaries as their earnings from cash and fixed interest investments will increase.
High interest rates – or the expectation of higher rates - push up the value of the Australian dollar, another rate that’s keenly reported in our daily news. Again, the winners and losers principle applies to the value of our local currency.
The exchange rate for the Australian dollar has been on a rollercoaster ride in the past 12-18 months. We saw the rate against the US dollar reach an all-time high of 97.86 cents in July last year, before it started a steady decline in line with growing concerns about world markets, hitting a low of 61.22 cents in October 2008. Since then the dollar has again been on the rise and at the time of publication of this newsletter it sits around 89 cents.
A strong dollar is good news for people traveling overseas because it buys them more local currency - their dollar goes further and so do they! It’s also good for importers as it lowers the cost of goods and services bought overseas. But flip the coin over and you have unhappy Australian exporters because a high exchange rate means the countries that buy from them have to pay more for products or services. As a consequence, they tend to buy less. One of our biggest export industries is education. When the dollar rises it affects the intake of international students at our universities.
When it comes to finance there will always be winners and losers. Rates will continue to change but the key is to stay focussed on the long term and not be distracted by short-term media messages.
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