Not everyone is better off when interest rates fall. Find out which Australians will be the biggest losers from the latest cut to official interest rates.
First-time home hopefuls
Interest rate cuts typically stimulate consumer spending, especially when it comes to property market. Lower interest rates are often a sign of encouragement to seasoned and first-time home buyers alike. With cheaper loans and a boost in confidence, first-time home buyers can expect to pay less for mortgages and free up more disposable income.
With the boost in the property market during this period, first-time home buyers will have to contend with the rising demand and growing competition, making it tougher for them to buy.
Risk averse investors
What is a ‘risk averse investor’? This describes an investor who prefers low risk investments like term deposits.
So, how will the current interest rate cut affect risk averse investors?
To simply put it, low risk investments will have lower returns. As interest rates falls, so will term deposit rates. This will have a significant impact on investment portfolios. Baby boomers transitioning into retirement could be faced with a decrease in income and lowered term deposit rate.
The Reserve Bank of Australia (RBA) adjusts interest rates to control economic growth and inflation. With interest rates and the Australian dollar closely tied, it is expected for the Australian Dollar to fall with the interest rate cut. The reason why this happens is because overseas investors will look elsewhere for a better return rate, which reduces the demand for Australian Dollar, causing it to fall.
When the Australian dollar is low, it drives up the cost of imported goods. For instance, if an importer is unable to sell the products to a wholesaler or consumer at the increased new cost, the importer will have to accept lower profit margins.
As the Australian dollar heads lower, it will also affect the cost of international travel. Jet fuel prices will increase, which means more expensive airfares, tours, cruises and even the cost of an Airbnb stay will surge.
Almost everyone in Australia has a banking account that earns interest. It could be your transactional account that you put your wages into or an online saver. All these accounts earn less interest when there is an interest rate cut.