financial planning adelaide

September Economic Update – Why rates Will drop

Posted on September 14, 2012 · Posted in General

Every cloud has a silver lining they say.  Who say?  Well, one third of Australians that have home loans would welcome a 0.50% reduction off their mortgage rates in time for Christmas.  OK, who is talking about clouds?  One third of Australians who do not have mortgages but rely on earnings from term deposits will be hoping that Glenn Stevens holds off but he won’t.

With the China story worrying everyone from adroit bankers to zealous miners I can’t help but think that the Reserve Bank is seriously considering employing one tool to reduce the value of our highly inflated dollar.

In my experience inflation has always been the over whelming issue on the interest rate horizon.  With inflation in check the Reserve can do something serious about the dollar (and helping business compete on the global stage and making tourism into Australia more palatable) by reducing the cash rate.

This will help business (both with sales and their interest expense) and consumer alike.

But then there’s our banks.  Will they pass on the reduction?  Probably not.  Europe is far from resolved so their cost of funds remains an issue.  America is in election mode so do not expect too much good news on the eastern or western horizon.

In addition, home loan approvals plummeted in July.  The four rate reductions since November have not resonated into building activity, clearance rates, property values, confidence or strength.

Being the contrarian that I am I have commenced a residential development three kilometres from Adelaide’s GPO and will produce a weekly update so feel free to keep up to date.  Go to:

http://www.financewise.net.au/2012/09/sub-division-and-construction-finance/

As we predicted Fixed rates have dropped to their lowest levels in three years and will continue to drop.  5.89% for five years is both a safe bet and a good bet that variable rates will drop further.

While Europe and the US are impotent and ran out of ideas and means a long time ago China is not and has not.

Chinese firms are cutting production, employees, inventories and imports owing to a global demand that is barely puffing despite being on a zero interest respirator.  Let’s look at their response compared to the US Fed who will print money.  Incidentally, the day this happens our dollar will go up by at least 1c so Glenn Stevens if you are reading you know what to do.

The Chinese have so much more wriggle room and I am not sure printing money will help Mitt Romney’s push for office.

So fellow mortgagee’s as we consider our Christmas expenditure we ought to factor in $32 per month per one hundred thousand dollars in lending as an interest saving when we are dealing with the credit card in January.