The RBA interest rate could keep falling over the next year, what should we do about it?
Term deposit holders must be looking on in horror as the interest they earn from their investment keeps falling. Can you believe it wasn't that long ago that you could get a term deposit with an interest rate above 5%?
Governor Philip Lowe of the RBA does not have an easy task. The RBA is meant to support the economy, without creating asset bubbles, whilst making sure Australia's currency is at a reasonable level compared to other countries. And somehow achieve an inflation target without it being too low or too high.
Most major countries have been devaluing their currency which has led to a race to the bottom for interest rates. The RBA has had to play that game too.
A lower interest rate has been good in the short-term for Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB). Over the longer-term it may not be attractive for net interest margins.
However, I think there's now a fair chance that we won't see any RBA cuts for the rest of 2019. The recent GDP figure still showed growth even though it was fairly disappointing and the September quarter could be materially better if the tax cuts help households and spending.
Interest rates are like gravity on asset prices. The lower the interest rate, the higher the asset prices can 'jump'. But it's not as though the economy is going strongly – interest rates would be a bit higher if it was.
The RBA will be monitoring the upcoming house price movements. Lending practices are much better now than a few years ago, but the RBA won't want to see house prices keep jumping higher. In August we saw house prices in Sydney rise 1.6% and in Melbourne go up 1.4%. More volume is expected in the spring, so we'll see how things go with more supply for buyers to choose from.
Foolish takeaway
I still believe these lower interest rates are here to stay for a long time. It would take a large, (mostly) unexpected event to send Australian interest rates back to 2% or higher. I believe that businesses and assets that can do well in a lower interest environment and also inflationary environment are worth owning – for me, Rural Funds Group (ASX: RFF) is a good long-term idea.
