Rising Interest Rates – is it a good thing?

Just when rates will rise again in this cycle is a hot topic of debate. Some forecasters have tipped as early as next month, others don’t expect a move until next year.

However, most economists and forecasters now appear to think an interest rate rise is likely before Christmas.

According to Herald Sun economic commentator Terry McCrann, it would take something dramatic for the RBA to lift rates as early as October.

But the longer it holds off, the more likely the individual banks will increase rates independently, he says.

“If they could be confident the RBA would hike in October or even November, they would wait – aiming to slip in, say, a 35-40 point hike on the back of an official 25-point move,” McCrann says.

“But if the clock ticks by and there’s no official hike, who will be first?”

According to statistics, the Australian economy is doing well but there are still many households that can’t afford to make higher debt repayments.

The good news is that Australia is weathering the global downturn really well. It is the only major developed country to record economic growth last financial year.

Aussie households and companies are still spending and expanding despite the financial crisis and recession in other countries.

The spend-now attitude has been encouraged by the Federal Government’s $60 billion stimulus package of cash handouts. Unfortunately all that fun has a downside.

There is concern that spending and economic growth will get out of control, inflation will start up again and interest rates will rise.

When people spend a lot, prices increase, which causes inflation to go up. When people don’t have money to spend, prices and inflation can go down or at least stay steady.

The RBA uses interest rates to control inflation. Ideally the RBA wants inflation to be between 2 and 3 per cent, which it believes is the right level for the normal forces of supply and demand.

When economic growth – spending and expansion – is in danger of going up too fast, the RBA increases interest rates to reduce spending and to slow down growth in the economy.

When the economy looks like it might slow down too much, the RBA cuts rates, to free up or create some spare money and keep spending ticking along.

Its guiding measure, however, is inflation. However, these decisions are made in advance of the growth or the slowdown actually taking place so RBA board members must constantly estimate what will or won’t happen in the future.

So the great news is our economy is in a strong position and will only continue to go from strength to strength. The down side, interest rates need to increase in line with this.

Now is the time to make sure your portfolio is stable and can withstand the increase. Implement those strategies that are going to see you through the market ups and downs coming through with a portfolio that will enable you to realise your future dreams.