Tuesday, November 25, 2008

Good news and bad news

If the Debt Futures Market (DFM) know their stuff, the Reserve Bank of Australia (RBA) is going to lower its cash target rate to 2.75 per cent by April next year. That represents a fall of another two and a half per cent from the current cash rate 5.25 per cent. To kick off this reduction, markets are pricing a massive cut of 125 basis points when the RBA meets at its next board meeting on December 2. That would be the biggest one-month cut in official rate since the onset of the 1990 recession.

If these forecasts prove correct, the cash rate will be at its lowest level for several decades. According to the monthly average of official daily data published by the RBA , the cash rate was at a low of 2.98 per cent in January 1960.

Economists argue that a shrinking Australian economy, falling asset prices and recession-like levels of business confidence will make the RBA more inclined to cut rates aggressively. A 125-basis-point rate cut next month would take the cash rate to 4 per cent. It would be the biggest cut since April 1990, when the RBA slashed the then 16.5 per cent cash rate by 150 basis points, as the Australian economy entered into a recession.

This is both good news and bad news.

  • Good news because exsitng and new mortgages will be so much more affordable. In the long run, this will help the broader economy in areas like retail, property and personal and business services.
  • Bad news for people who rely primarily on bank deposits for income (retirees) as deposit rates fall.
  • Good news for equities markets as return on investment in shares become more attractive relative to income earned in bank deposits

However, its really bad news though because rate cuts of this magnitude highlight the seriousness of the economic conditions we are about to head into.

(source: Faifax Ltd)

Thursday, November 20, 2008

Tight, easy and neutral

Monetary policy is a tool by which government (usually through an independent central bank) can influence the economy by affecting interest rates.

To stimulate the economy when things are slow a central bank, like the Reserve Bank of Australia or the Federal Reserve in the US, will typically reduce interest rates to encourage people and businesses to borrow. To constrain the economy, they do the opposite and rates are increased. This makes the cost of loans more expensive and discourages people from borrowing. When things are going OK they neither raise nor lower rates.

When banks are raising rates they are said to be employing tighter monetary policy. When they are lowering rates they are easing monetary policy. When they leave rates alone monetary policy is said to be neutral. This is very general and other factors in an economic cycle can influence whether monetary policy is tight, easy, or neutral.

At present Australia, like almost all other world economies, is experiencing significant economic downturn. Despite the optimism that we may avoid a recession, the Reserve Bank (RBA) is still very concerned about the effect interest rates are having on economic activity and therefore are in the process of easing monetary policy.
Australian home-owners with a variable rate mortgage can look forward to an RBA cash rate around 3.50 per cent by March or April next year. For your mortgage this means a rate of about 5.10 to 5.60 per cent

The RBA states in its minutes that the reason for lowering rates by three-quarters of one per cent last month was that "given the changing balance of risks, there was an advantage in moving the setting of monetary policy quickly to a neutral position".

This means that despite the large interest rate cuts we have experienced recently, the RBA considers official interest rates may only be back to a "neutral" setting. Given that we are on the brink of a recession, this statement highlights how much further the RBA will cut so that rate are "easy" and therefore begin to stimulate the economy.

This means that Australian home-owners with a variable rate mortgage can look forward to an RBA cash rate around 3.50 per cent by March or April next year. For your mortgage this means a rate of about 5.10 to 5.60 per cent

Friday, November 14, 2008

Are your goals SMART?

In the long run you only hit what you aim at.
Therefore, though you may fail to begin with,
you should aim at something high.

Clear goals are important because they provide you with something to look forward to. Financially qualifying where you wish to be at some point in the future gives you both a target to aim for and something to measure your progress against. The thing about all goals is they should be SMART.

SPECIFIC: What exactly will you accomplish?
MEASURABLE: How will you know when you have reached your goal?
ACHIEVABLE: Do you have the resources to attain your goal?
RELEVANT: Why is the goal important to you?
TIMELY: When will you achieve your goal?

Ask yourself these five questions when you set yourself a goal and you'll go a long way towards achieving it.