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Interest rates

Interest Rates Cut to 2.75%

Nathan Lear
Partner/Private Client Adviser
13 May 2013

The Reserve Bank of Australia (RBA) has moved into new territory cutting interest rates by 0.25% to an all-time low of 2.75%. Lower than expected inflation numbers and pessimistic market expectations are behind cut.

As I said in my blog in October last year, interest rates were tipped to fall 0.5% down to 2.75%. This has now happened.

So how low can they go?

The looming slowdown in mining investment growth led the RBA to start cutting the cash rate from 4.75% in November 2011. Higher growth and investment in non-mining sectors is required to pick up the slack. Lower interest rates are intended to encourage business investment in other growth sectors.

If the RBA doesn’t see conditions improving and the growth they are hoping for, it is quite possible they could cut again in the next few months down to 2.5%.

What does this mean for investors?

Great news if you have a home loan as your repayments are set to fall. However, if you hold a lot of cash or term deposits, your rate of return is going to get worse. Term deposits are averaging around 4% per annum and likely to head down towards the low 3% range.

After factoring in the effect of inflation, the real return investors are receiving from holding significant amounts of cash and term deposits is very low.

As a result much of this money has found a new home in the sharemarket over the past year, in particular high yielding stocks. This has helped drive the share market higher. Rising share prices have resulted in dividend yields declining. However, the dividend yield on Australian shares remains healthy at 5.5%, including franking credits. Far more attractive returns when compared to 4% on term deposits.

Falling interest rates should continue to boost the outlook for company returns. It should also put downward pressure on the Australian dollar benefiting companies with offshore earnings.

The key to managing external policy changes, such as RBA cuts, is to have a diversified portfolio with a good mix of income and growth characteristics.

If you would like to discuss this in more detail please feel free to contact us 96821900.

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.