Are interest rates at their peak? The Reserve Bank paused rates in April before raising a quarter per cent in May in anticipation of a spending-focused Federal Budget. The Budget was actually quite constrained, providing only limited extra welfare support.
Inflation is falling, down from 7.8 per cent for the year to December to 7.0 per cent in the year to March. But is it falling fast enough for the Reserve Bank? It is keen to return inflation to the three per cent area quickly.
The RBA knows if it raises rates too far it risks slowing the economy too much and causing a recession. That is definitely to be avoided. So the RBA is likely to wait and see. Consequently fixed interest markets are now betting that rates will stay steady for several months.
This is good news for borrowers squeezed by big loan payment increases. It also brings more clarity and stability for everyone. Businesses can plan their orders, stock and cashflow more confidently. Supply chain delays are easing, helping prices come down.
A more stable interest rate outlook will help investors too. Those buying property with borrowings now know what their payments will be and can weigh them up against the expected rental income.
People concerned about their super and pension funds know that most funds hold a spread of defensive and growth-oriented investments. The typical balanced fund has around two-thirds in growth areas and one-third in defensives such as fixed interest and cash.
With higher interest rates the defensive part of the portfolio is now earning more. Term deposits pay four per cent or better, so super fund investors can be confident the fixed interest part of their account is earning at around that rate.
The growth assets in a super fund, particularly shares, will benefit from stable business conditions. Most well-established companies have fairly low debt levels so higher interest rates won’t be a problem.
The economy will slow, consumer spending will ease, as the RBA desires. That may reduce profits for consumer discretionary stocks. However mining and other companies are doing well and likely to be little affected.
Shares paying good dividends can withstand higher interest rates much better than those paying little or none. If the dividend is equal to bank deposit rates investors have no reason to sell.
Many companies now pay excellent incomes. Property trusts offer 6 to 8 per cent. Banks pay 5 to 6 per cent. The big mining companies pay 6 to 8 per cent. Those in the unpopular gas and coal area offer 8 to 15 per cent income. Prices are unlikely to fall much while dividends are high.