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Doom and gloom u-turn

Peter Switzer
22 July 2009
Yesterday’s date — 21 July — should be noted as a great day in our battle with the Global Financial Crisis. It was the day that one of the country’s doomsday merchants backed off in its scary rhetoric, and the Reserve Bank conveyed the message that interest rates could fall because the inflation outlook was on the improve.

But the best news was delivered by a guy who I argue is the country’s foremost expert on interest rates — Andrew Willink. This guy, who started an interest rate monitoring business in the 1990s called Cannex, and now has Rate City, says that fixing interest rates now might be premature. He thinks the fixed rate could fall in the future!

More on that later.
Step back in time
Back in January, the respected Access Economics was very negative on the global economy, China and the Aussie economy.

The newspapers ran with the story that “Australia will go into a recession this year with a Budget that’s buggered!” Further, it was declared that the nation’s economic boom would “unwind scarily fast”.

More than 300,000 people were predicted to lose their jobs and this was how Access summed it up:

“Batten the hatches. This is not just a recession,” it insisted. “This is the sharpest deceleration Australia’s economy has ever seen.”

One reason the think-tank was so negative with its view on China was that our very important customer for mining exports would slow much more quickly than optimists were forecasting. 

Unemployment outlook

Now Access has peeled back its negative forecasts and think unemployment will peak at 7.5 per cent. This still will hit a lot of Australians, as unemployment is now at 5.8 per cent, but this u-turn on negativity from the Canberra-based consultancy will actually help the improvement process. Imagine a business owner in January who read the negative forecast on the economy and who might have shelved an expansion project. That same person now might be more inclined to borrow and hire to make the dream happen. Back in January dreams were seen as potential nightmares as media reports would have spooked many business builders and employers. 

Rate cut leeway

This is why 21 July is so important. The day was made better when the Reserve Bank released its minutes from its last board meeting. It said that they were happy with the economy and the level of interest rates, but if something went wrong with the global economy, they have plenty of room to cut rates again.

Personally, I think the cuts are over but if inflation keeps falling, there could be another rate drop. In fact, Andrew Willink has explained why he thinks fixed rates of interest could fall. He says the global credit crunch has pushed up the price of money worldwide, but as it improves he thinks interest rates should fall and that would flow onto fixed rates. 

To fix or not to fix

Of course experts can get big calls wrong, but this is a view worth considering. In fact, Willink likes what I call the Claytons Fixed Rate idea. On my Sky News Business Channel program, he agreed with the story I wrote on the subject for this website.

Basically, with Claytons Fix you find out what you would pay if you switched from a variable rate loan to a fixed loan and make these higher payments into your current loan. This will reduce the time you spend paying off your loan, decreasing the total amount you pay to the bank and if rates rise you can redraw some of the extra money you have thrown against your loan to help you meet the higher interest rates.

It’s a voluntary approach to fixing your home loan. Of course, a fixed loan now could be better if rates go sky high quickly and you have a five- or 10-year fixed loan but as I always remind my readers — to fix or not to fix is a gamble. Good luck with it.

For advice you can trust contact Switzer Financial Services.












Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.




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