This week the Australian Central bank raised the official interest rate for the first time since March 2008. It was the first of the G20 to do so, and in this author’s opinion, entirely justified in its actions. After all, interest rates were dropped to emergency settings during a time of extreme uncertainty over the global economic outlook, and now that the picture has clarified, and in a much better way than most had anticipated, it was sensible to bring rates back to more sustainable levels.
What always surprises me with the media reaction to such news is how it is almost always portrayed as a negative. Indeed, the market also reacted negatively to the news, with the ASX200 dropping close to 0.5% after the announcement.
Funnily enough, our international peers saw the news as a positive, and once we had the endorsement of our bigger brothers we managed to see the glass as half full and the market recorded solid gains the following day.
Later in the week it was revealed that the unemployment rate unexpectedly dropped last month. This not only helped validate the reserve Bank’s move, but also paved the way for further increase in interest rates. This time however the market wasn’t perturbed by the prospect of higher rates and the market closed at a fresh 12 month high! Such is the nature of the beast I suppose.
The thing to remember is that interest rates are perhaps the most important tools we have to ensure that the economy grows at a sustainable pace. When growth is slowing, we lower rates to stimulate the economy, when growth is proceeding at an unsustainable pace, we lift rates to apply the brakes and ensure we don’t get overcooked. Everyone knows this, and yet people will still complain when rates are lifted.
What would you prefer: an economy in recession with rising unemployment but lower interest rates, or a strong and vibrant economy but with higher interest rates? Remember that recessions are associated with lower job security, lower remuneration prospects, reduced investment returns (or more likely investment losses) not to mention higher social problems (such as increased crime and alcoholism etc). In a strong economy more of us are employed, usually with better conditions and pay, our investments are performing strongly, we have the means to purchase more goodies, take more holidays and generally enjoy a better standard of living.
Now I myself have both a mortgage and a margin loan, but I happily welcome any rise in rates, because it means that the economy is getting better, and I will benefit both directly and indirectly from all that is associated with economic expansion. Having said that, while I have my fair share of debt, it is entirely within a reasonable range and I can easily weather even a significant increase in rates.
And that’s really the key point. When we take on debt, especially longer term debt such as with mortgages, we have to expect that rates will fluctuate over the term of the loan. So just be sensible about it all. If you never leverage yourself to an unrealistic level you will never lose too much sleep when rates rise.
Make the markets work for you!