• Mayfair 101

Official Interest Rates Cut to Boost Consumer Confidence

Updated: Jun 28, 2020

The Reserve Bank of Australia (RBA) has today cut official interest rates yet again to a record-low of just 0.25% in an attempt to support the Australian economy following the outbreak of COVID-19.   Interest rate cuts are a means of stimulating economic growth by making capital more affordable. For existing borrowers rate cuts can lead to lower interest repayments, and loans for new borrowers may now become more affordable. Overall, it can increase consumer confidence, which is what the RBA has in part sought to achieve with the interest rate cut, given the significant impacts of COVID-19.

Is quantitative easing the solution?

Quantitative easing is often referred to as “printing money”. Today, it usually refers to central banks buying government securities in the market, and thus increasing the level of cash in the economy.  It is a move that reserve banks around the world have historically resorted to as a means of stimulating growth by putting more money into supply. We are in a position of needing economic growth to be stimulated, but is increasing the supply of money the solution? An increase in the supply of money can lead to an over-supply of money if that money isn’t taken out of circulation over time, which can lead to lower (and therefore potentially negative) interest rates. It’s a simple yet often overlooked factor. If the RBA decides to push “go” on its money printer, we consider that rates will head into negative territory over time, just like they have in many overseas countries.

What you can do about lower rates

Many investment products are directly tied to interest rates, meaning investment returns are about to take a further dive.  Products that are exposed to single sectors or single countries are facing challenging times if their sector or country is suffering following the COVID-19 outbreak. We consider that a multi-sector, multi-geography, multi-currency strategy is the best way to manage risk and prepare for unexpected events like COVID-19. Diversification is a risk management strategy the Mayfair 101 Group believes strongly in, with a portfolio spanning business credit, real estate, financial services, emerging markets and growth companies.

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