Tuesday 31 January 2012
Wednesday 11 January 2012
Interest rate cuts - not always a good thing.
http://avantfinancial.com.au/pdf/1201%20Newsletter.pdf
Lower interest rates might provide some welcome relief for home buyers and existing home loan customers in 2012, but they are not such good news for people dependent on income from their investments nor an indicator of a confi dent, growing economy.
The Reserve Bank (RBA) cut interest rates by 25 basis points, or one quarter of a per cent, in both November and December last year, taking the offi cial cash rate to 4.25 per cent. The majority of mortgage lenders followed suit, bringing home loan interest rates down to their lowest level in more than two years.
Bond yields and rate cuts
One of the best indicators of the future direction of interest rates is the yield on government bonds, and by this traditional measure the market clearly thinks rates have further to fall.
In 2011, 10-year government bond yields fell to 3.8 per cent, the lowest for 60 years. Normally, investors would expect to receive a higher rate of interest on long-term bonds than short-term cash as compensation for locking their money away for longer, but these are not normal times.
Interest rates in the US, Japan and other major economies are close to zero and this, coupled with Australia’s relative economic stability and prosperity, has caused a flood of foreign money into Australian government bonds, pushing up bond prices and reducing yields.
Expectations in 2011 were that local interest rates would rise to keep the lid on inflation caused by the mining boom. But with domestic inflation in check and the depth of Europe’s debt crisis even clearer, in November the RBA finally decided to loosen the reins on local interest rates. Europe’s woes may take years to remedy, hampering global recovery and the relatively strong Australian economy.
Australia’s economy may be the envy of many countries, but it is chugging along, not powering ahead. It grew by 2.5 per cent in the year to September, well short of the long-term average of 3.25 per cent. Inflation hovered around 3.5 per cent last year, above the RBA’s target range of 2–3 per cent, but most economists forecast inflation will fall slightly this year.
Future moves
Falling interest rates reduce the cost of borrowing for business so they are potentially good news for company profits and share prices. But the share market has also been spooked by the debt crisis in Europe and the lack of a clear political strategy to fix it. In this uncertain climate, Australian shares fell 12.7 per cent last year.
CommSec chief economist, Craig James, expects at least one more rate cut by the Reserve Bank in 2012. "Clearly with inflation under control and significant risks abroad, the Reserve Bank stands ready to cut rates and shore up Australia’s economy", he says.
However, home buyers should not celebrate too quickly as the banks look like moving the goalposts to cope with global pressure on their funding costs. ANZ chairman, Mike Smith, announced in mid-December that borrowers should no longer expect the ANZ to match official moves in interest rates.
Other banks are likely to follow his lead. This will break the strong link that has grown up between movements in the RBA’s official rate and bank mortgage rates. Whether it leads to more competition or more conformity among the major lenders is tomorrow’s question. For now it is a case of "watch this space".
www.perthfinancialplanning.com.au
Lower interest rates might provide some welcome relief for home buyers and existing home loan customers in 2012, but they are not such good news for people dependent on income from their investments nor an indicator of a confi dent, growing economy.
The Reserve Bank (RBA) cut interest rates by 25 basis points, or one quarter of a per cent, in both November and December last year, taking the offi cial cash rate to 4.25 per cent. The majority of mortgage lenders followed suit, bringing home loan interest rates down to their lowest level in more than two years.
Bond yields and rate cuts
One of the best indicators of the future direction of interest rates is the yield on government bonds, and by this traditional measure the market clearly thinks rates have further to fall.
In 2011, 10-year government bond yields fell to 3.8 per cent, the lowest for 60 years. Normally, investors would expect to receive a higher rate of interest on long-term bonds than short-term cash as compensation for locking their money away for longer, but these are not normal times.
Interest rates in the US, Japan and other major economies are close to zero and this, coupled with Australia’s relative economic stability and prosperity, has caused a flood of foreign money into Australian government bonds, pushing up bond prices and reducing yields.
Expectations in 2011 were that local interest rates would rise to keep the lid on inflation caused by the mining boom. But with domestic inflation in check and the depth of Europe’s debt crisis even clearer, in November the RBA finally decided to loosen the reins on local interest rates. Europe’s woes may take years to remedy, hampering global recovery and the relatively strong Australian economy.
Australia’s economy may be the envy of many countries, but it is chugging along, not powering ahead. It grew by 2.5 per cent in the year to September, well short of the long-term average of 3.25 per cent. Inflation hovered around 3.5 per cent last year, above the RBA’s target range of 2–3 per cent, but most economists forecast inflation will fall slightly this year.
Future moves
Falling interest rates reduce the cost of borrowing for business so they are potentially good news for company profits and share prices. But the share market has also been spooked by the debt crisis in Europe and the lack of a clear political strategy to fix it. In this uncertain climate, Australian shares fell 12.7 per cent last year.
CommSec chief economist, Craig James, expects at least one more rate cut by the Reserve Bank in 2012. "Clearly with inflation under control and significant risks abroad, the Reserve Bank stands ready to cut rates and shore up Australia’s economy", he says.
However, home buyers should not celebrate too quickly as the banks look like moving the goalposts to cope with global pressure on their funding costs. ANZ chairman, Mike Smith, announced in mid-December that borrowers should no longer expect the ANZ to match official moves in interest rates.
Other banks are likely to follow his lead. This will break the strong link that has grown up between movements in the RBA’s official rate and bank mortgage rates. Whether it leads to more competition or more conformity among the major lenders is tomorrow’s question. For now it is a case of "watch this space".
www.perthfinancialplanning.com.au
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