The RBA has moved to cut interest rates to the lowest level in over 50 years.
Interest rates play a large role in determining the performance of your investments. Here we look at how interest rates and expectations about future rates have impacted 5 different assets classes: Australian shares, Global shares, Emerging market shares, Australian bonds and Gold.
First, what has caused interest rates to fall?
In order to understand how different asset classes have been impacted by Australia’s low and falling interest rates, it is first important to explain how our terms of trade (the relative price of the things we export versus the price of things we import) have impacted interest rate expectations and the Australian dollar over the past year.
Over the last 2-3 years Australia’s terms of trade have fallen drastically as the price of our major exports like iron ore have collapsed. After reaching an all time high of 118.50 in 2011, Australia’s terms of trade have plunged into the low 80s and look likely to continue falling as commodities like iron ore, copper and oil fall to levels not seen since 2008 or earlier.
A fall in the terms of trade is sometimes referred to as an unfavourable movement in the terms of trade because it means that Australia must export more goods and services to maintain the same level of imports. This is bad news for the economy, reducing inflation and tax receipts for the government, putting pressure on the budget and jobs growth, and in turn forcing the Reserve Bank (RBA) into considering interest rate cuts to encourage spending and stimulate the economy.
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