Interest Rate Instability !

It looks likely that tomorrow the Reserve bank of Australia will again cut interest rates.  We have a sluggish economy and the thinking is that an interest rate cut will pass on to the rate banks charge their home mortgage customers.  With more money in their pockets it is expected we will see a spending spree that invigorates clothing retailers and the restaurant trade and creates a surge in at least casual work opportunities.

We are perilously close to the point when our modest savings will earn no interest and that brings the danger that desperate people will look for riskier investments to try and claws back some of the income that underpins their standard of living.   In particular, self funded retirees often have too much money to draw the age pension, but will quickly dissipate their nest egg if they draw from it to pay everyday expenses.

We have been experiencing a string of interest rate cuts that have not delivered a spending boom.  Few have opted to reduce the payments on home mortgages and instead simply pay the same amount to lower the period of the loan.   The most popular form of saving investment in Australia is money held in a term account with a bank or a building society.   In the past that has delivered an acceptable rate of interest with the saver negotiating a fresh term each time that becomes due.

The closer interest rates come to zero, the more savers will look to riskier options such as the stock market, and that is running at an abnormally high level in anticipation.  Money flowing into stock purchases are pushing prices higher and usually those stock prices have little relation with dividend earnings.   The pundits warn that share prices are well in excess of dividends in many market areas.

Another option is the housing market.  Buy a home and become a landlord, collecting rent to supplement your income.   Sydney house prices have just suffered a fall and appear to be heading back to buoyant heights, but all it takes is a rumour to see the buyers desert the market in droves.  The wise would insure their rental investment and that together with rates and routine maintenance will quickly eat into the rental return.

The biggest danger to this huge savings pool that faces dwindling interest returns is the certainty that new investment opportunities will appear in the market place.   They can take many forms and they usually appear to offer a rewarding return for those who get in at an initial stage.   It can take the form of tree planting on degraded land to ultimately supply timber needs, to Llama  studs or the growing of some miracle vegetation that will become an industry essential.   Usually the associated costs quickly overwhelm the proposed profit prediction.

The pundits predict that interest rates will eventually return to normal levels.   In its wisdom, the Reserve bank of Australia has the task of guiding this country's economy.   Unfortunately its decision to artificially lower interest rates will put at risk the savings of middle  Australia.   When interest rates do return to normal if will be a moot point what remains of the savings pool that delivered retirement stability.