Writer’s block is not something I have ever been afflicted with as I’m not a writer. However, in the past few weeks I’ve been stuck. Every time I sat down and began writing an article about a particular topic, another topic would come to me that I think people will be more interested in. So, I decided to combine the topics and add a few more.
The most interesting and topical stories for me in the past four weeks have been:
- Vladimir Putin’s declaration that liberal democracies are no longer relevant
- Ivanka Trump trying to inject herself into a conversation at the G20 and Christine Lagarde’s priceless reaction
- The Australian Federal election and the surprise majority
- What else? Let me think…oh, I know the two recent interest rate cuts in Australia.
You’re a broker, you need to talk about interest rates.
Seriously, how good’s Putin? After manipulating the former Eastern bloc countries’ elections through promoting his non-liberal views he has succeeded (without firing a single shot) in getting like-minded politicians elected in Hungary, Poland, Germany, Italy, France, Czech Republic, Slovakia, Britain and the US. As well, he’s managed to destroy any ambitions of Georgia and Ukraine to break away and join NATO (there, he definitely fired shots).
That is a serious achievement.
Interest Rates, Interest Rates. For God’s sake.
Then there was the ever present Ivanka. She managed to make Theresa May look like she was being listened to. Something that hasn’t happened since she became the British PM. How long does it take those Tories to elect a new leader? And Christine Lagarde’s look of sheer malice seemed to scream “shut up you idiot!” However, nothing comes close to Alexandria Ocasio-Cortez’s put down of Ivanka: “It may be shocking to some, but being someone’s daughter actually isn’t a career qualification.” BOOM!
Are you going to talk about interest rates? Not just yet.
In the land of Oz, the people have spoken. After the Labor Party being an unbackable favourite prior to the election the Liberals came home with a wet sail and won a majority allowing them to govern in their own right (if you don’t count the unrepresentative swill in the Senate). So, more of the same I suspect. Already there are murmurs undermining the new Prime Minister from the ranks of his own party.
INTEREST RATES! Ok, ok, I’m getting to it.
Our Reserve Bank meets on the first Tuesday of every month. Last month they cut the official cash rate by 0.25%. This week they followed up with another 0.25% rate cut. The official cash rate is now at 1%. The lowest it’s ever been. Last month the rate cut was passed on in full by three of the four major banks and this month only one passed it on in full (the one that failed to do so last month).
There’s been a lot of commentary about interest rates so I’ll let the experts inform you what’s happening next.
I’m going to go back to basics. It’s important to remember when buying a house your repayments are determined by four key criteria. Yes, one of them is interest rates. The others are the principal which you borrow, the term of the loan and whether or not you choose to pay interest only (IO) or principal and interest (P&I).
The final one is key. We advise our clients not to be seduced by the lower repayments of IO as you never actually pay back the loan and it ends up costing you much, much more over the life of the loan.
Politics and Economics
So, why did I waffle on about the other topics at the start of this article and not just cut to the chase?
Two reasons really. Firstly, it’s a bit of fun but more importantly interest rates are influenced by many economic factors which can in-turn be influenced by political shenanigans. If you doubt that have a look at the latest statement on Monetary Policy released by the RBA to accompany the interest rate cut.
Much of the economic commentary in the local press has been about micro-economic issues (the detail) but keeping up-to-date with global events can help us determine the future direction of world markets which ultimately is where our banks source their funds.
For example, Russia’s influence in Europe has grown enormously since the GFC. Right wing parties with ideologies very close to that of Putin’s did very well in the recent European Parliamentary elections. It was similar ideology which drove the British to vote in favour of exiting the EU (though there’s no evidence that Russia meddled in this vote). The economic ramifications of that move will be enormous for Britain.
Similarly, the US has adopted a protectionist and isolationist stance. Most publicly against China with the US slapping on substantial tariffs. The US also has economic sanctions in place for a whole host of countries. Sanctions can go either way. Economically they can cripple a country and bring them to the negotiating table or they can get aggressive. Remember what caused the Japanese to attack Pearl Harbor? Economic sanctions starving the Japanese of energy. In their minds they were left with little choice.
So, why pick on Ivanka? Well, it’s the G20 summit. A meeting of the top 20 global economies. In such a meeting where Macron, May Lagarde et al are discussing serious topics leaving diplomacy to the likes of Ivanka is like asking a chimp to solve the mystery of black holes.
The Australian Federal election was a vote for business as usual in this country. The Labor (yes, that’s how they spell it) Party was the first political party in 26 years to offer up a bold and detailed economic plan in the lead up to the elections. They suffered their worst defeat in living memory. Back to a small target strategy in the next election then.
While the RBA will focus on immediate numbers like the unemployment rate, inflation etc. To be fair they have been screaming (as much as the RBA can) at the Government to assist the economy by backing up the rate cuts (monetary policy) with fiscal stimulus (spend more, tax cuts etc to stimulate the flatlining economy). The Government did just that last night passing the more than $150b in tax cuts through the senate.
There are many other global issues which threaten the world economy. Like Iran firing on tankers and drones in the Straits of Hormuz or North Korea threatening to fire missiles at whichever country has upset them most recently but these obfuscations follow a well trodden pattern and have largely been factored into world markets. It’s the escalation from previous patterns that need to be watched here. Like Iran purposely breaching the imposed limits of their uranium stockpiles.
What’s the moral of the story or is it stories?
When you’re borrowing for thirty years it’s worth keeping your eye on more long-term issues as well as the month to month movements of interest rates.