Why Australian investors are impacted by international interest rates

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June 1, 2022
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In today's global economy it’s impossible for any country to behave as though it’s in a vacuum. These days, every developed country is interconnected and even if Australian shares no border with another nation, economic factors like international share prices and interest rates affect Australian investors. Australia is an importer and exporter of goods and services, a tourism destination and a buyer and seller of cash and financial products. This means interest rate changes in other countries impact on the Australian economy, and ultimately your investments. It pays to be aware of this influence because it may help to inform your investment decisions in the lead up to, and during, your retirement.Interest rates are the price of money. If you need to borrow money, the interest rate is how much the bank is happy to lend you money at, given the return they require to make the transaction commercial for them. If you’re borrowing in Australia this rate will include a margin over the ‘cash rate’ set by the RBA. The cash rate is also the basis for the interest rate a bank is willing to pay you on your deposits.Interest rates are one indicator of the health of a country’s economy. For example, when the USA raises its cash rate, it’s signalling that the US economy is strengthening. This encourages big investors to choose the USA over countries with lower interest rates.

Global interest rates have a wide (and unpredictable) sphere of influence

For superannuants and investors, international interest rates will most likely affect the rate you’re paying on investment loans or margin loans for shares and how much interest you receive on your cash balances or term deposits.The country with the most global influence on interest rates is of course, the USA, and its Federal Reserve Bank (known as the Fed or the Fed Reserve). Once upon a time, when the Fed raised or lowered the American cash rate, Australia’s Reserve bank would follow suit and the Australian banks would then follow on. However, this has not been the case since the mid 1990s. Saul Eslake, a well-known Economist and Vice Chancellor’s fellow at the University of Tasmania says this is because Australia’s economic cycle does not follow the US cycle as closely as it used to. Australia’s trade relationships with the USA have also changed since the 1990s1.So, international interest rates do affect Australia but not always directly, immediately or proportionately.For instance, during the GFC the Australian Reserve Bank held off on reducing interest rates because the Australian economy managed to withstand the impact of the crisis for several months. Although the RBA did eventually reduce rates, and investors suffered with a 10% reduction in share values, the economy as a whole stayed stronger than those of many other developed countries2.

Interest rates and investment loans

When an overseas national Reserve Bank like the Fed raises US interest rates, the impact on Australian rates isn’t immediate but it’s still telling. Most Australian banks borrow money from US banks to fund their activities. If the cost of their borrowing increases because the Fed rate has gone up, it will eventually impact customers borrowing from them3. Even if the RBA hasn’t raised interest rates in response to the Fed move, the Australian banks may still raise rates independently, to offset the higher rates in the US biting into their profits. Australian banks have proven many times that they will not always follow the RBA’s lead with interest rates.

Interest rates and cash deposits

For investors with cash deposits, a rise in interest rates is a good thing. Low rates affect overall returns for any investors with decent sized cash balances. As your retirement date nears, increasing your cash holdings as a proportion of your investments is traditionally considered a wise move because of the reduction in risk. This means many Australians who are nearing their retirement date are moving into a cashed-up situation that doesn’t offer them much reward in terms of interest income.

Why Australian investors are impacted by international interest rates

2022 Interest Rate Environment

At the time of publishing, international headwinds are increasing, and there are significant international factors at play - not only due to pandemic, supply and demand challenges, and war, but also due to significant inflationary pressure globally.It is over a decade since Australians last saw an interest rate rise; while external pressures are factoring into this decision, as Reserve Bank Governor indicated in his announcement of the increase. "The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, that was expected. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions."

Want to learn more?

For more information and guidance on how your investments may (or may not) be affected, contact our experts at RJS Wealth Management. They’ll help you understand how your individual situation may be impacted by overseas economies and their decisions. Call 1300 27 28 29 to find out more.Sources:

  1. News.com – Australian Economy: What the US Rate Rise means for Australia
  1. Australian Bureau of Statistics – Year book 2009-2010
  1. The Motley Fool – Dec 2016: What Higher US Interest Rates Mean to Aussie Investors
  1. Reserve Bank of Australia ­– Media Release 2022-12, 3rd May 2022

This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this fact sheet can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.

June 1, 2022

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