June Newsletter – RBA ‘cure’ for inflation

The 2023 financial year news has been dominated by inflation and the prescribed ‘cure’ of rising interest rates.

Basically, the RBA wants to reduce inflation by reducing the money supply and its only way of achieving it is to increase the price of money.

That is by putting up interest rates.

A year ago the Reserve Bank Cash rate was 0.85% and today its at 4.1% with the likelihood of one or more further rate rises of 0.25%.

Today inflation is at 7% and is likely declining slowly.

Many commentators think that the cash rate needs to be closer to the inflation number on a longer term basis.

We hope and expect that this occurs mainly through a reduction in inflation.

The implications of rising interest rates have been profound, but not all of them bad.

Firstly and most obviously cash is finally giving a return with term deposit rates above 4%.

After almost a decade of no return on cash, this is beneficial to all investors.

Equities/ shares have come under pressure for three main reasons, one because what is known as the risk-free return premium has increased.

Basically, that means investors can now get some sort of return from cash and so are less compelled to invest in shares.

Also, the cost of borrowing for companies has increased and this reduces profits.

And finally the whole point of increasing interest rates is to slow the economy and effectively reduce profits.

The main risk now is that the Reserve Bank has gone too far too quickly with interest rate rises and that it leads to recession.

Only immigration is stopping a recession and on a per capita basis we are probably already there.

However, the bulk of the interest rate rises are behind us and the stock market is forward-looking.

We may even see interest rate decreases overseas towards the end of the year.

Overall it’s been a volatile year and the outlook is clouded.

Investing in quality investments with sustainable income streams is even more important in inflationary periods.

Just a quick reminder that in order to get a tax deduction for superannuation contributions in the 2023 financial year the fund must receive the contribution by Friday week.

Any outstanding contributions should be done now.

Please let me know if you have any queries or questions about your own investments.




More Newsletters

November Newsletter

We certainly live in interesting times. As I have written about previously inflation and the medicinal therapy to control the symptoms being increasing interest rates

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