Australians have experienced the sharpest increase in rates since the 1980’s with 11 interest rate rises since May 2022. Steep rate hikes have been seen from central banks around the world, impacting on global market returns.
The swift rise in global interest rates, together with surging inflation and the war in Ukraine, resulted in a challenging 2022 calendar year for investors with underperformance from equity and fixed interest markets.
There were few places to hide with even bond markets, which are typically considered secure, producing one of their worst returns.
With the cash rate now at 3.85 per cent (as at May 2023), consensus reports suggest Australia is approaching the end of the rate hiking cycle.
The RBA has warned that further tightening may be required to bring inflation down to the two to three per cent target and markets suggest the possibility of one more rise in 2023 will take the cash rate to a peak of 4.1 per cent. While this is higher than the historically low rates over the past ten years, the cash rate is not expected to reach pre-GFC levels of six to seven per cent.
The full impact of the RBA’s rate rises has yet to be seen in the Australian economy. The last of the low fixed rate mortgages secured while cash rates were at record lows in 2020 and 2021 are due to expire by the end of 2023.
With the rates paid by these borrowers set to more than double, the mortgage pain could flow on to impact the Australian economy and possibly bring on a recession. This would then flow through to the Australian property market experiencing a significant correction.
The positive impact of the higher cash rate is more attractive returns for ‘secure’ investments such as fixed interest assets, term deposits and high interest cash accounts.
After a long period of minimal to no returns on cash investments, investors are now able to secure one-year term deposit rates of around 4.5 per cent per annum. This is good news for short-term investors such as those saving for a capital purchase or home loan deposit.
Bonds are also expected to produce better returns over the next few years due to higher interest rates.
Higher returns on cash and fixed interest investments are good news for retirees looking to allocate a portion of their wealth to ‘secure’ assets. These are assets that offer capital stability with some income return. The yield on these investments haven’t been as attractive while cash rates were at record lows over the past ten years.
This article was first published in the Winter 2023 Issue of Financial Times.
Lindzi Caputo is a financial adviser of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052) ABN 65 106 772 696