Why do interest rates change?
The cash rate is what the banks charge each other for loans. The Reserve Bank uses interest rates to manage the economy. Interest rates usually fall because the economy is not doing so well. A cut in interest rates allows money to be more freely available and to help stimulate economic growth.
On the other hand, a rise in interest rates makes borrowing less attractive. Higher interest rates mean that demand for borrowing money will drop. The Reserve Bank usually does this to tackle a rise in inflation and also tackle growth that may be unsustainable.
Lower interest rates are good for debt and bad for savings
As a spender, it's great to see interest rates falling. It's good for the retail sector which is usually one of the key sectors to benefit from a fall in rates. It's also good for any debt whether it be on your credit card, mortgage or any other loan. It's not good news for savers because it means that they usually get a lower return on their investment.
How does it impact the sharemarket?
A fall in interest rates helps the sharemarket. Companies like us are usually net borrowers of money so when interest rates fall, companies pay less in interest costs. Companies that have a high level of gearing see a greater benefit. Traditionally, the utilities and property sectors are the most highly geared on the Australian market.
A fall in interest rates means that consumers have more to spend so companies that are involved in discretionary goods like Harvey Norman and David Jones usually benefit.
Why does the Aussie dollar move?
When interest rates fall it means that investors buying into our currency get a lower yield. This means that usually they head somewhere else to park their money which results in the Aussie dollar falling. An interest rate drop usually means that our currency will follow suit. It's a time to start thinking about investing overseas. If you are invested abroad, you want the Aussie dollar to fall so that you make money on the currency movement as well as hopefully your investment.
Official interest rates have fallen for the first time in 7 years from 7.25% down to 7.00%.
With interest rates forecast to be cut by another quarter of a percent before the end of the year, its celebration time for shoppers and hopefully for the sharemarket.
To buy or sell shares, go to http://www.belldirect.com.au/.