Interest Rate Cut !

The interest rate in Australia is in the hands of the Reserve bank and with the economy slowing the pundits of the financial world are predicting a rate cut.   The Reserve bank meets on the first Tuesday of each month and the anticipated change is that we will see a cut of 0.25 points with a similar fall to quickly follow.

Predictably, the banks will be slow to pass a rate cut on to home mortgage customers and quick to apply it to term deposits.  At present term deposit interest rates are hovering a little above two percent and any cut will be critical to self funded retirees who have received their superannuation nest egg and have the task of making it last for the remainder of their lifetime.

If this cut eventuates it will be the first movement since August 2016.   Interest rates have not been keeping pace with rising prices and five years ago deposits were earning better than four percent. There is now the expectation that we will see interest rates drop to just one percent.

A rate drop will benefit those with variable home mortgages and probably bring a lot of first home buyers back into the market but that may not stop the present downward trend in home prices.  That is more of a realistic adjustment of the price hysteria that was ever pushing prices higher.

Interest rate relief is marginally available to customers looking further than the big four Australian banks.  Three year and five year terms are bringing three percent to term deposits but obviously these will be influenced by Australian rates if they go lower.  The safety aspect makes many customers reluctant to consider any source other than the traditional Australian banks.

Apart from self funded retirees, there are also many with a part pension who rely on their savings to provide the income pensioners are allowed to earn without lowering their pension.  Many will find they are now depleting capital to draw the amount they previously gained from the interest earned.  There is a danger than in desperation they may turn to far riskier investments in the hope of reversing that capital depletion.

Many may turn to the stock market but that is also facing change as we absorb the impact of artificial intelligence and robotics in the manufacturing sphere.  Many previous high income earners have fallen on hard times and those investing for the first time face a daunting task.  There is no shortage of new firms with an enticing prospectus that predicts high profits and good returns.  Making a buying selection is a bewildering experience for a novice.

The big danger is that we appear to be heading into an era where too much money is looking for a safe place to earn a reasonable return.  It is inevitable that the criminal element of society will respond accordingly.   The wise need to remember than axiom that " if it seems too good too be true " - then it probably is !