Business News

Don't panic on rates

| More

by Peter Switzer

No matter what the headlines say. No matter what the experts warn. No matter what your gut feelings tell you, don’t panic — interest rates are not about to go sky high. And don’t live in fear of another financial shock — this is a low order risk.

Don’t get me wrong, I love the media and that’s why I work in it. Like many Australians I’m a newspaper and radio junkie. And I selectively engage with television, but you have to be careful when it comes to the media — they love bad news.

Watch your tongue

The Reserve Bank Governor, Glenn Stevens, walked into the media trap when he told a Canberra committee of pollies that rates could soon rise. The critically important word is “could”.

The RBA boss made it sensibly clear that the current cash rate of interest at three per cent is, as he called it, “an emergency rate”. When the emergency is over we need to head back to normal levels of around five per cent. This puts the typical home loan interest rate around seven per cent.

That’s where rates are heading for over the next two years and this should be factored into your calculations if you are thinking about fixing your rates.

The statement

On my Sky News Business Channel program, SWITZER, I interviewed the chief economist of ABN AMRO Morgans, Michael Knox. He addressed Governor Stevens’s comments by referring to the Monetary Policy Statement that came out ahead of his address to the parliamentary committee.

He reminded us that the Statement from the RBA said inflation was heading to the low parts of the two to three per cent band the Big Bank targets. He said that’s good for interest rates.

He then pointed out that the RBA forecasted we would grow at 0.5 per cent this year and 2.25 per cent next year. He then said we have to grow at 3.4 per cent to see unemployment fall and that lead him to believe that the official cash rate won’t be jacked up until mid-2010. The economics team at CommSec thinks it will be around March next year and all of these predictions make a lot of sense.

They seem more sane than the money market bet that rates could rise by October. At the moment the futures market suggests that there’s a 50 per cent chance of a rate rise then but Knox, as I have said before, says the markets often get these rate guesses wrong.

Tread carefully

Another factor that will make the Reserve Bank tread carefully on rate rises will be linked to what the Treasury boss Ken Henry said in a speech recently. He referred to another possible, financial shock. While he was not tipping one, he warned it would be unwise to rule one out.

Fixed or variable?

Personally, I think it’s a low order risk but if one did happen, the RBA would cut rates. By the way, Governor Stevens says another negative quarter of growth is also a possibility and until that’s ruled out I can’t see the Bank raising rates prematurely.

If you have a mind to fix your rates, make sure you get the lowest rates possible because you might be paying higher rates for two years until the variable rates catch up with the fixed rates.

You could always voluntarily fix your rate by paying the amount you would pay with a fixed rate into your variable home loan. This works if you have a redraw facility, which means you can access the money you build up if you need it and it can be used if rates go higher in the future.

If they don’t, you will pay off your home loan quicker and save a lot of interest. Good luck with your gamble but don’t be scared too much by my media mates who need a headline.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Tuesday, August 18, 2009