Directors' Column

Low interest rate environment and what this means for you

It seems that everyone has a different understanding of the benefits and negatives of todays’ low interest rates and the resulting impacts on our community. I hope my layman’s guide to our interest rate environment is informative.

Why are rates low? The Reserve Bank of Australia sets low rates in the expectation that banks will do the same, to help stimulate the economy. The current low rates are typically a reaction to COVID-19, low wages growth, low employment, changing job types, high household debt, categories of jobs going overseas, trade wars, global political uncertainty, demographic change, decline in potential output growth and changes in households' and firms' risk appetite.

Unlike previous cycles of globally low interest rates and fragile economies, the traditional levers of monetary policy are inadequate in our COVID-19 led environment.

Current low rates plus government support and stimulus programs do help stimulate the economy.

The objective is to provide an environment in which employers feel confident, incentivising them to employ more people, at increasing or higher pay, which results in higher inflation (RBA target is 2-3% pa). The benefit of higher inflation is that it repeats the cycle of confidence, employment and wage growth and means the economy is stable and resilient to a range of common changes.

Borrowers pay less interest on borrowings and pay off debt more quickly. The RBA hopes this will encourage you to take the reduced risk to borrow money to buy property, goods and services. This gives the economy a boost, as more people are employed to handle the increased demand for goods and services, resulting in more jobs, more spending and a healthy economy.

However, before you embark on increased borrowing you should seek advice to ensure it is best for your circumstances and you have the capacity to manage a future increase in interest rates.

What are the negatives? Shares and property prices rise. Interest on your savings is less, which can be difficult, particularly if the interest earned supports your living expenses or retirement.

If you think of investing in shares rather than saving in a bank, you should seek advice on the incumbent risks, particularly, tax treatments, fees, delayed ability to convert to cash and other issues including that historically high share dividends may not be repeated. You need to have a good understanding of your decisions on your short, medium and long-term earnings expectations.

Therefore, we encourage you to seek sound financial advice before making an investment decision that effects your lifestyle. We expect but have no certainty, that all of the economic levers available to government will work as intended or to the level required for stability. Financial advisors understand the risks of any investment option. They can suggest ways to mitigate your risks informed by their knowledge of your personal requirements, commitments and expectations.