Markets Update - June
Interest rates have gone up. What does this mean for our members?
On 7 June 2022, the Reserve Bank of Australia (RBA) announced that it was increasing its cash rate by 0.50%. This means the cash rate, which is the base rate that banks use to lend to one another, is now 0.85%.
The cash rate has a direct impact on how much interest banks charge their customers on their loans, so it is expected that most home loans will also increase by 0.50% this week.
The RBA hasn’t increased its cash rate since 2010, when it was 4.75%. We then saw a decade of rate cuts, leading to the cash rate declining to 0.10% in November 2020. It remained here until the first increase of this cycle last month.
Given it has been so long between rate rises, this article explains why the RBA chose to lift rates and discusses how this may affect our members.
Why did the RBA increase rates?
In one word – inflation.
The RBA, like most central banks, raise and lower interest rates to stimulate economic growth and control inflation. If inflation is high, they might raise rates to try to control it. This is because raising interest rates makes borrowing money more expensive. And when borrowing becomes expensive, it can mean less demand for goods and services – like a house or a car.
Generally, as the pace of economic activity slows, inflation also slows.
In the minutes to its May board meeting, the RBA outlined several factors driving inflation: COVID-driven supply shortages, Russia's invasion of Ukraine pushing up prices (both countries are key suppliers of food and energy) and disruptions to global goods supply due to ongoing lockdowns in China.
These pressures are worldwide and have led to an annual rate of inflation of 8.3% in the US, its highest level since the early 1980s. Similarly, inflation is at multi-decade highest in the UK and across Europe.
Australia’s inflation rate across the year to the end of March was 5.1%. As shown below, this was Australia’s highest level of inflation since June 2001 and is well above the RBA’s target range of 2% to 3%.
If inflation persists above 3%, the RBA will need to continue to increase rates across coming months in an attempt to get it under control.
Financial markets currently expect the cash rate will continue to increase to approximately 3.10% by the end of 2022 and 3.90% by the end of 2023. While those interest rates sound enormous relative to recent history, the figure below shows that these expected rate rises will bring the cash rate back towards its historical average.
What are the expected impacts of higher interest rates?
The initial and most direct impact felt by members will be on their mortgage payments. If you have a variable rate home loan, then you will see an increase in the amount you need to repay almost immediately. On the other hand, if you have a fixed rate home loan, you won’t see an increase until the fixed-rate period expires.
If the recent increase is passed on in full by banks, someone with a typical $500,000 principal and interest loan over a 25-year period could expect to pay approximately $130 a month in extra repayments.
Increases of a further 2.25% across the rest of the year, as currently predicted by markets, would result in payments on the same $500,000 mortgage increasing by approximately a further $625 per month.
What does this mean for my super?
Higher inflation and increases in interest rates causes heightened volatility across financial markets. This can adversely affect the value of your financial assets across the short-term, including your super.
High inflation is bad for consumers as it means that prices are rising quickly, and this puts pressure on the cost of living. We can already see the hit to our wallets from higher petrol prices and rising supermarket bills. When interest rates increase, consumers spend less and profits decline further. These reductions in demand reduce corporate profits, lowering prices in share markets.
Increasing interest rates also affect fixed interest markets, as there is a negative relationship between the price of these assets and interest rates.
The MSCI All Countries World Index, which tracked the performance of global shares, has returned minus 11.65% in Australian dollar terms since the start of the year. Similarly, the Bloomberg Global Aggregate Index of international fixed interest securities has returned minus 8.54% year-to-date.
Spirit Super’s portfolio is obviously not immune to periods of extreme volatility. Through diversification and careful investment management, our Investment Team seeks to mitigate downside risk during these periods.
While any negative return is felt by all members, our Balanced Option has been far less affected by ongoing market volatility compared with the broader markets, returning minus 4.7% across the year.
We’re here to help
There are a few simple things you can do straight away:
- Develop a budget to plan for what may lie ahead. ASIC’s budget planner can help track your spending and identify non-essential expenditures
- Now is also a great time to check in that you are getting the best possible deal on every day essentials such as power, insurance and phone and internet contracts.
It is important that members recognise the difference between their short-term assets and liabilities and long-term investments, such as their super.
Across the 10 years to April 2022, Spirit Super’s Balanced Option has returned 8.27% to Accumulation members and 9.24% to Pension members. 1
If you're thinking about switching investment options or you are unsure which option is best for you, please get in touch with us.
You can even book a one-on-one chat with one of our expert Superannuation Advisers. They can offer helpful, straightforward advice to ensure your super is working for your situation.
This service comes at no additional cost – it's all part of being a Spirit Super member.
1 Past performance is not a reliable indicator of future performance.