How To Judge Possible Rate Rises

 

I am not a financial advisor, so please take my advice with a grain of salt. However, I was having a conversation with someone once about why I saw rate rises coming, and why I believed they would be the trend up or relatively high for some time, and he said, “Why did you not tell me this?” I said, “Would you have listened?” He just looked at me...we both knew the answer.

However, I thought it might be helpful me to note how I approach analysing what is happening in the financial markets, so that my family can be best placed to deal with different challenges in the economy, especially regarding rate hikes.

The Australian Reserve bank has only one approach to inflation, only one: increase rates.

Hence, you should not follow the financial analysts who seek to predict whether or not rates will rise one month, or another.

Rather, you should take note of what is happening with inflation. If inflation is strong. Then rates will rise. But more than that, take note of the things that cause high inflation. Things like:

- High Immigration.

- Increased government spending.

- Wars in fuel rich regions. Like the Middle East, or Russia. These regions produce so much fuel any war in them will cause economic pressure, increased fuel prices, and therefore inflation.  

- Housing stimulus packages.

- Significant interference in the economy (like when they shut things down during the big cough).

- Labor governments being in power (this is not a pro LNP point, it is just true that Labor governments tend to spend more and increase immigration more, both of which cause inflation. But LNP have been known to do this too, at times). But Labor’s general approach is to stimulate the economy in various ways which generally causes higher inflation.

If you follow these causal factors you will have a rough idea of when rates are going up and when they will go down. And when you see these factors beginning, or advancing, then you can lock rates at the low and ride out the high with fixed rates.

The cool thing is, if you have decent equity on your home, then if you lock and economic factors change, then you can simply refinance with a new bank. This is much harder if your loan is new, or you just upgraded your house for a bigger loan. But if you have done that and locked rates you have a fixed payment and you can budget better.

The point is: All the things that cause inflation are running rampant right now, and have been for some time, with no indication that this will stop. Hence, you can look at the macro picture and have a general idea of where things are headed in the medium term.

I would never recommend playing the variable game. There are very few, if any, advantages.

Also, pay down your debts as fast as you can. I really believe things are going to get rockier.