August 2022 Newsletter

It’s August and as winter draws to a close there’s snow in the Alps and the wattle is blooming. Many Australians will soon receive a sizeable tax refund, if they haven’t already, which should help ease those rising cost-of-living blues.

Rising inflation and interest rates were the focus of attention in July. The US Federal Reserve lifted its target rate by 75 basis points to 2.25-2.50% to tackle surging inflation of 9.1%. At the same time, the US economy contracted by 0.9% in the June quarter, following a 1.6% drop in the March quarter.

By contrast, Australia is performing relatively well. In his first economic statement, treasurer Jim Chalmers downgraded growth forecasts to a still solid 3.75% last financial year and 3% this financial year. Inflation jumped to 6.1% in the year to June and is forecast to peak above 7% in December. And the Reserve Bank lifted the cash rate by 50 basis points to 1.35% in July, with a similar increase tipped this month and more to come. Governor Philip Lowe said he expects rates to get to ‘at least’ 2.5%. Unemployment fell to 3.5% in June, but rising prices and interest rates dented confidence. The ANZ-Roy Morgan consumer confidence index sits at 82.4 points – below 100 is pessimistic. While the NAB business confidence index fell 5 points to +1.4 points in June.

The biggest hit to inflation has come from housing and construction prices and petrol. But the housing market is cooling due to rising interest rates, with national home values easing 0.6% in June and new dwelling starts down 6.5% in the March quarter. Petrol prices are also easing, down 19c to below $1.93 a litre in late July on falling global oil prices. The Aussie dollar gained a cent to finish the month around US70c.

In such wonderful internal news, King & Whittle proudly acknowledges Leeanne Dimech and her 25th work anniversary. She is such a valued and loved member of our King & Whittle family.

Leeanne exemplifies what we stand for at King & Whittle and has been an integral part of our team and the growth of our firm for more than two decades.

Leeanne has mentored many successful clients and accountants over the years and continues to nurture the progression and success of our valued clients and staff here at King and Whittle.

The respect is mutual and Leeanne continually goes above and beyond all professional expectations.
On presentation at our Melbourne office to acknowledge this amazing milestone, Leeanne reminisced on all the wonderful client interactions over the years and all the changes in advancements in technology. It made us all think where we were 25 years ago!

The future is bright and we are so fortunate to have Leeanne's extensive knowledge and experience guiding us forward.
A warm congratulations Leeanne.

Interest rates and investing

What are interest rates?

The interest rate is the amount a borrower pays for borrowing money from a lender, which is why it's often referred to as the cost of borrowing.

Conversely, the interest rate is also the amount earned on money deposited into a bank or financial institution, also known as the rate of return.

Why is the cash rate so important and how does it influence interest rates?

The interest rate a bank charges borrowers is influenced by the cash rate, which is set by the Reserve Bank of Australia (RBA).

The cash rate is the interest rate on unsecured overnight loans between banks, and is an important part of a central bank's monetary policy which is why it receives so much attention.

The primary objective of the RBA's monetary policy is to encourage strong and sustainable economic growth. One way to do this is by using the cash rate to influence interest rates, which in turn influences economic activity by changing the incentives for households and businesses to save or consume and invest.

So, an increase in the target cash rate will generally mean an increase in the interest rates charged by banks and financial institutions if passed on.

Higher interest rates make the cost of borrowing more expensive while also encouraging households to save more. This usually reduces spending and consumption, placing less demand on goods and services, which reduces upward price pressures and ultimately helps to control inflation.

How can rising interest rates affect investments?

When it comes to investing, interest rates affect different investments in different ways.

Bonds have an inverse relationship to interest rates. When interest rates go up, bond prices tend to fall. This is because new bonds issued at the higher interest rate will generate higher returns, so there's less demand for existing bonds at the lower rate. The opposite happens when interest rates go down.

Interest rates can also affect the share market indirectly. As rising interest rates make the cost of borrowing (and therefore the cost of doing business) more expensive, company revenue may be negatively impacted as liabilities increase, leading potentially to less growth and lower market valuations.

Property investments can also be affected by rising interest rates as mortgage repayments become more expensive, which in turn reduces the incentive for investors to borrow money to invest in property.

What should investors do when interest rates increase?

Rising interest rates can be cause for concern for some investors, particularly existing bond investors who may be witnessing fluctuations in their portfolios.

It's worth noting that there can be a lot of noise and chatter surrounding bonds during periods of changing rates, but Vanguard research has shown that rising rates can be a good thing for bond investors if their investment horizon is long enough. Bonds should also be considered for their portfolio diversification benefits, not just for the returns they generate.

It's also a timely reminder that markets are forward-looking and have already priced in future return expectations. Investors should be similarly forward-looking and focus on the long-term, which includes making sure they are diversified across different asset classes and sticking to their chosen asset allocation despite volatility in the short-term.

Contact us if you'd like to find out more about how interest rates could impact your investment portfolio