Tom Scollon
Chief Editor
The Reserve Bank left interest rates on hold this month – but this is not to say that interest rates will not rise before year end. Sideline commentators, economists and bond traders are all pointing to a rate rise in the coming months.
We are now into an era of rising prices and inflation and thus rising interest rates. Almost all world trading blocs will see interest rate rises in the coming months.
Most Australians seem sanguine about that likelihood and I guess we shouldn’t panic for the moment. The May interest rate move of .25% however, did cause us to hold back from spending – well a little. We are much more interest rate sensitive than most other nations and we seem to take it hard when they do come. We have had two rises in the last 15 months, but in the USA there has been 17 straight rises of .25%. It seems to be just a part of life there.
Apart from the need to slow inflation, there is a need to slow spending even more. In the 70’s, we saved 15% of our income. Today we spend 2% more than we earn. If you consider that many households at least balance their budget, that means there are many more out there that are just going into more and more debt. Much of household debt is housing related and this is where panic can happen.
Another rate rise may be just manageable for some but another two increases could see some panic real estate selling for others.
Rising interest rates also impact on business as it is a cost of doing business. Corporate Australia generally is in fairly good shape with company cash ratios being the highest we have seen for some time. Nevertheless, there will be a slowing in corporate profits at some point.
So real estate for most is not an option for spare investment cash and bonds are not overwhelmingly attractive. For these reasons we are less likely to see a flight of capital out of equity markets whilst there is the prospect of some further share gains in the coming years – if you select wisely.
Either way the gains will be more modest than we have seen over the last three years. That’s life.
Enjoy the ride
Tom Scollon
Chief Editor