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Interest rates

Interest Rates Cut Again. Good or Bad News?

Nathan Lear
Partner/Private Client Adviser
7 Oct 2012

Interest rates were cut last Tuesday by a quarter of a per cent and the official cash rate now stands at 3.25%. Rates have steadily been declining since early 2008 when they peaked at 7.25%. 

The main reason for declining rates has been a slowing economy and fears that it will get worse.

Are interest rate cuts good for you?

The answer depends on your financial situation. If you are a home owner with a mortgage then a cut in rates means your mortgage repayments will fall and you will have more money in your pocket. This is a good thing.

If you are an investor, such as a self-funded retiree and relying on the income being generated from cash and fixed interest investments then falling interest rates means you are earning less from your investments. 

With volatility in investment markets over the past few years, many investors are sitting on large amounts of cash and term deposits.

At current rates, investors are lucky to receive returns of 4.5% per annum on cash and term deposits. The cost of living rises each year, so with inflation running at around 2-3% per annum, a 4.5% return could leave investors with a real return of 1.5%. With many experts tipping rates to fall at least another 0.5%, this real return could end up being closer to zero.

What does this mean for investors? If you are a retiree and living of the income being generated from your cash and fixed interest investments, you are effectively eating into the capital of your assets and the real value of your assets are declining as the cost of living rises each year.

How do you protect your portfolio from falling interest rates? A diversified portfolio with an allocation to growth assets such as shares and property is important to protect your portfolio from falling interest rates and the effects of inflation. Over a long period of time quality growth assets such as shares and property provide growth to offset the effects of inflation. 

For example, the top 200 companies on the Australian sharemarket are currently yielding gross income of around 5.5%. So in some cases shares are providing investors with a higher income return on their portfolio than fixed interest.

Key Takeouts

– Interest rates cut to 3.25%

– Good news for those with a mortgage

– Bad news for investors relying on income from cash and fixed interest investments

– Growth assets such as shares and property can provide relief from falling interest rates

– Diversification is key

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.