How Interest Rates Impact Your Investments
The use of interest rates as a financial lever is crucial for global economies. They have an impact on borrowing costs and return on savings, which makes them a crucial component of the returns on many investments. It may also have an impact on the value of the currency, which therefore has an effect on other assets.
Therefore, since borrowing is more affordable when rates are low, greater corporate investment may result. Economic activity slows down when interest rates are high or rising. As a result, changes in interest rates can be used to manage inflation.
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Steadily Increasing
Interest rates have been near zero or even negative in several nations for the past few years, but things have recently started to shift.
When it came to rising interest rates, Australia lagged behind other developed countries, but since changes started last year, the Reserve Bank of Australia (RBA) has done so quite frequently. In actuality, the base rate has increased by 3.5% since June of last year.
The need to reduce inflation is the main driver of the increases. Long-term RBA goals include maintaining inflation between the 2% and 3% range. Clearly, that threshold has been severely exceeded, as the consumer price index is currently much above 7% annually.
Losers and Winners
Rising interest rates have two sides. If you are a borrower, it hurts, and if you are a saver, it is typically welcomed.
Nevertheless, not all effects of an increase in interest rates are the same for investors, and sometimes the severity of those effects may be more a reflection of how you handle risk in your investments. Rate increases may be welcomed if you are a conservative investor with a sizable chunk of your portfolio in cash.
On the other side, rising rates may start to reduce the overall value of your holdings if your portfolio is growth-oriented and the majority of your investments are, let’s say, shares and real estate.
This amplifies the case for investment diversification and for knowing your short-, medium-, and long-term objectives.
When Shares Decline
On share markets, higher interest rates typically have a negative effect. While the effects of increased rates may take some time to spread across the economy, the stock market frequently reacts right once as investors lower their expectations for future corporate development.
Also, compared to more conservative fixed interest options, shares are seen as a greater risk investment. Investors may move to bonds if low risk fixed interest investments are providing superior returns.
But, that does not imply that stock values are falling everywhere. Value stocks, such those of banks, insurance businesses, and resource corporations, typically outperform growth equities in this scenario. Also, investors choose equities that are already profitable over those that only promise future profits.
Yet, the stock market is very uneasy right now, especially in the wake of the failure of several mid-tier US banks. As a result, even the traditional seasoned performers are having trouble.
Options on Fixed Interest
Government, semi-government, and business bonds are investments with fixed interest rates. The prognosis is less favourable if you have long-term bonds invested because they have lost value as a result of the recent hikes in interest rates.
The yield curve for fixed interest is currently inverted, which means that long term rates are lower than short term rates. Uncertainty among investors regarding future economic growth is reflected in this circumstance, which is a major indicator of recession and deflation. Of course, this is not the sole indicator of the likelihood of a recession, and many Australian pundits think we can avoid this situation.
What about the Housing Market?
How interest rates affect the housing market? It is not a surprise that home prices have decreased from their peak in 2022 given the waning demand brought on by increased mortgage rates.
Early this year, new investment loans had a 35% yearly decline, according to the data of Australian Bureau of Statistics.
Contact Us Today
The shifting economic fortunes of Australia can make you wonder if your investment portfolio is balanced. Schedule an appointment for financial planning and to discuss your portfolio if you have any questions.
Success Wealth Group is here for you and your family to help you save money, taxes and invest for the future.We look forward to helping you to ‘Bringing Wealth to Life’.
About Lan Nguyen
Lan is the Founder and Chief Strategist at Success Accounting Group, Melbourne based CA firm. In a matter of short 8 years she has built up a reputable Chartered accounting firm with 3 offices and a team of 6 professional accountants and support team members. Her mission is to provide Innovative and Strategic Financial advice to help her customers make smarter financial decisions today for a brighter future.
Success Accounting Group is for established business owners who would like help to grow a sustained business. As a business owner you understand what drives your business success with our accounting team taking care of the rest.
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