1. Are interest rates rising good or bad for investors?
There are a number of impacts that interest rate rises can have on your finances. Interest rates can help to heat and cool the housing and share market around the country. The interest rate rises have come at a difficult time with the war in Ukraine, cost of living pressures, transport constraints post pandemic. At the time of writing this, the Reserve Bank of Australia (RBA) has lifted interest rates for the third consecutive month. An increase of 50 basis points has been confirmed from 0.85% to 1.35%. This upward trend is off the back of record lows of 0.1% to current rates 1.35% (in July 2022). These three consecutive rises in the cash rate target have not been seen since 2010. Those at higher risk of being negatively impacted would be households that have higher debt through mortgage or personal loans. The main reason being that they now must find additional cash flow to support their loan. But is interest rate rises always a negative impact?
2. What economic factors are influenced by interest rates?
Interest rates can be seen to impact markets as the RBA aims to buy more bonds in order to lower the cost of fixed lending rates. With the interest rates originally not set to rise until 2024 the RBA has backflipped and lifted them swiftly from their lows. The big banks now predict a rate rise of up to 2.6% by the end of the year. This is to also head towards inflation target levels of between 2-3%. By keeping wages growth above 3% and a lower inflation target the economy can stabilise post the COVID pandemic. Pushing the rates too high too quickly could result in the economy falling into a recession. If interest rates were to rise to 3.5% this would cause the variable rate of mortgages to push up to almost 6%. This would double the amount of interest payments that households currently pay. To compound these repayments with the cost of living rises could see households under high mortgage stress.
2. What is the impact of cutting or raising rates?
The interest rate rises can have a vast impact on the overall economy. Usually when the RBA cuts interest rates the share market rises. This is because the cost of borrowing is cheaper and therefore investors who are lending funds are receiving a lift in their borrowing capacity. On the other hand, by shrinking the supply of money, it makes money expensive.The households still have bills to pay and therefore have less disposable income to spend on goods or invest. When the rates rise a company that has high debt will see a decrease in profitability. This in turn could have a negative impact on the share price of a stock. With a decrease in future cash flows the share market could experience a decline.
4. What industries perform better with an increase in interest rates?
This does not apply to all companies as some experience benefits from the increase in rates. Financial institutions for instances would benefit from an increase in profit margins. They benefit as they can charge more for the funds that they lend to businesses and individuals. Brokerage and insurance firms also benefit in a growing economy. They can increase activity and therefore the amount of interest/insurance that the firms collect. Retailers, industrials and manufacturers also benefit from the upswing in the economy. Improved employment opportunities and healthier household incomes can allow families to spend more on goods. On the flip side the house market will suffer as a direct result of the cost of borrowing being higher. Therefore as nothing is guaranteed, it is important that you do your own research before deciding on where best to invest your funds.
Interest Rates Summary
The increase and decrease of interest rates is part of any economy. There must be a balance in order for the economy to grow and not overheat or cool too quickly. Some industries can perform better than others. However there is no guarantee and therefore should not be considered in isolation. To learn more read on to find out more about investing in the share market or real estate.The content provided in this article is general in nature and not financial advice. Please consult a licensed advisor for advice in relation to your unique circumstances.
