Inflation setback for potential rate cuts + a Swiftie guide to good money habits

Happy Friday everyone,

The big money takeaway this week is that interest rate cuts are a long way off following the latest inflation figure this week. More on that in a minute.

Also in this newsletter:

• Using Taylor Swift to inspire good money habits.

• Fixed home loan rates being cut.

• Some perspective on current interest rate levels.

• How much rents are changing.

• What property Australians want to buy.

Inflation setback for potential rate cuts

There is no doubt Wednesday’s March quarter inflation figure was a setback. Higher than expected which means any possible cut in interest rates is a long way down the track. I reckon we’ll be lucky to get a cut this calendar year.

The Reserve Bank looks at the “trimmed mean” figure (takes out any abnormal variations in the CPI basket) which rose higher than the expected 1 per cent for the quarter and 4 per cent annually. It is still well outside the RBA target range of 2-3 per cent and even above the 3.5 per cent that the RBA had been forecasting.

Reserve Bank Governor, Michele Bullock, has been talking about the “stickiness” of inflation and that it wasn’t coming down fast enough… this is exactly what she was fearing. That last drop in inflation to within the 2-3 per cent target range would take longer than people expected.

That means the RBA won’t cut interest rates anytime soon and some are even expecting another rate hike as a knockout blow for inflation.

The annoying thing is the inflation rise is being driven by factors beyond our control. Consumers are doing the right thing and tightening their belts to slow price increases on discretionary items like clothing, footwear, household goods and travel.

But the big price rises are on essential non-discretionary items beyond our control. The biggest drivers of inflation are: 

• Rents – Caused by a shortage of available rental properties to cope with the influx of international students and migrants. Ask the Federal Government why they didn’t plan better.

• Secondary education – This is basically the result of rising private school fees which are well above inflation. So complain to your school council and ask why you are being ripped off.

• Health services and pharmaceuticals - Healthcare costs have always been a financial black hole as treatment costs and drugs keep getting more expensive.

• New dwelling construction costs - Building a new home has been hit by shortages of labour, materials and availability of land. Building approvals are at a 10-year low which, combined with high immigration, means these costs don’t look like slowing for some time.

• Vegetables - Unfortunately Mother Nature plays a big role here with prices affected by seasonal factors and the weather.

• Insurance premiums and other financial services - Insurance premium rises are extortionate. A year ago we were told it was because of natural disasters but this last summer was comparatively quiet when it came to bushfires and floods. The key here is never automatically renew your policies before comparing the market to see if there are better deals available.

Keeping interest rates in perspective

There is understandably disappointment that interest rate cuts are being put on the backburner.

It is absolutely horrible that average Australians are being squeezed by the recent rise in interest rates and that so many small businesses have been sent to the wall because of the impact of those rate rises. Throw in high inflation as well and it has been a devastating combination. 

But to keep it in perspective, the current cash rate of 4.35 per cent is not that far above the average of the last 35 years.

History tells us that the average official cash rate in Australia from 1990 to today has been 3.85 per cent… 0.5 per cent below the current cash rate. Over that period the cash rate has ranged from the all-time high of 17.5 per cent in January 1990 to the all-time low of 0.1 per cent in November 2020. 

The reason Aussies feel like they’ve been hit with a financial sledgehammer is because we’ve come off those all-time low rates and had to cope with the sharpest, fastest rise in rates back up to the current level which is only slightly above normal.

It has been a shock and brought enormous hardship. 

But those record low pandemic interest rates have skewed our perspective on rates. It has lured us all into a false expectation that we should be able to get back to those days of cheap money.

Frankly, I hope we don’t. It’s a fool’s paradise.

Low interest rates are used to stimulate a sick economy. They dropped to 0.1 per cent during the pandemic because Australia and the rest of the world had to be locked down. Economies were decimated.

Without low interest rates and huge government support (JobKeeper and JobSeeker) we would have been in an economic depression.

Thankfully the economy has now recovered. Economic growth is slow but steady and interest rates are appropriate for this inflationary environment.

Fixed home loan rates are falling right now

Borrowers hanging out for the RBA to cut the cash rate could save now by shopping around, with a growing number of lenders reducing their rates for new customers, according to the team at Compare The Market.

Macquarie Bank is the latest to reduce its variable rates with some offers moving down by up to 0.1 per cent.

It is the second time Macquarie has delivered an out-of-cycle rate cut this year. In February the challenger dropped its advertised variable rate for customers with a 70 per cent LVR from 6.17 per cent to 6.15 per cent. The new reduced rate will be 6.14 per cent.

It follows ME Bank’s decision to move on fixed rates, with some offers dropping by as much as 0.6 per cent.

There is certainly healthy competition in the home loans market, ripe for borrowers to take advantage.

The RBA mightn’t budge over the next few months but that doesn’t mean homeowners should have to sit and suffer bad rates. Banks are competing hard to attract and retain customers but it’s really up to borrowers to force those moves.

I’ve have seen some banks apply drastic measures with some swooping in at the 11th hour with an incredible offer. The message is, don’t wait around for the RBA to drop rates. Better deals could be available to you now.

Some market-leading variable rates are currently as low as 5.94 per cent. For someone with a $750,000 home loan on a rate of 6.74 per cent, switching could help them save $402 on their monthly repayments.

Rental roundup… the pain points and where there’s some relief

As the latest inflation figures show, it’s still a tough time for renters. Since the start of the pandemic, rents have risen on average $200 per week across Australia. Perth has topped the list, with an increase of $280 per week. Hobart has seen the lowest at $100 per week.

According to real estate giant Ray White, the comparative strength in rental growth is broadly similar to what we've seen with price growth.

While rents have risen a lot, it comes after a prolonged period of very little rental growth. In the four years prior to the pandemic, rents nationally increased by only $25 per week. Rents actually declined by $30 a week in Perth. Brisbane units also saw a rental decline.

Globally in 2020, according to the OECD, Australia was one of the best places to be a renter in the world with very low levels of rental stress. 

Ray White’s chief economist, Nerida Conisbee, says that while the 10 per cent of households under rental stress has increased in Australia since 2020, the ranking of Australia is unlikely to have changed significantly. Rental challenges are occurring pretty much everywhere… under-building, relatively strong population growth and changes to household types are not just an Australian problem. 

While rents have risen sharply, it does seem to be improving, although it depends on where you live.

Hobart rents have actually declined over the past 12 months. Sydney and Melbourne units are now seeing a decelerating rate of rental growth, as are Brisbane houses.

The opposite is occurring in Perth and Adelaide. Like their house prices, rental growth in these cities is amongst the strongest in Australia. 

What sort of property do we want to live in?

I thought this graph from a Westpac property briefing was fascinating.

It shows the property preferences of Australians and breaks it down into first home buyers, new home buyers and investors.

While there has been a big push to build medium density properties, like home units and townhouses to relieve housing shortages, it seems the preference across all buyers is for a traditional freestanding house of around three bedrooms.

Swiftmania has hit Aussie hip pockets hard – and not only the young

If you have trouble communicating with your teenage or adult children about good money management strategies, I’m here to help. Use Taylor Swift as inspiration. Get them to read this (they’ll laugh, as mine did, at the italics).

As a grandfather with teenage granddaughters, and a Swiftie myself, I’ve felt the impact firsthand. You could say it’s left some of us in the red.

And the release of Taylor Swift’s new album The Tortured Poets Department means more vinyls and more merch to splash out on.

Whether you’re the lucky one who has most of their finances in order, or someone who needs a bit more guidance, here are 13 swift ways to get yourself out of the woods and kickstart your ‘savings era’. 

Say Bye Bye Baby to debt

One question I get a lot is, “should I build my savings or pay off my debt?” In most cases it’s better to pay off debts like credit card balances and personal loans as quickly as possible. That’s because interest rates on some of these accounts can be over 20 per cent, so you’ll pay much more over time.

Consider savings Untouchable

Once you’re no longer haunted by debts, it’s time to work on saving. The team at Compare the Market crunched the numbers for me and found that putting $100 a week into an account with an interest rate of 5 per cent would leave you with $5,426 at the end of the year. I call it the magic of compounding. Consider the money untouchable and avoid dipping in. 

Recover money that’s Invisible

Right now, there’s roughly $2 billion in unclaimed money in Australia. Using services such as Moneysmart, you might be able to identify money lost from various bank accounts, investments, shares or even a life insurance policy. Have a look and see if you can say You belong with me.

Shake Off higher premiums

When it comes to insurance products, you do have some control over the price you pay. First, shop around to compare premiums on offer for you. Increasing your excess is one tip, it means you’ll pay more if you need to claim, but you’ll likely pay less for your regular premium – sometimes it can drop hundreds of dollars!

Got an auto-renewal? Should’ve Said No!

When the cost of insurance or energy goes up, don’t just tolerate it – compare it.

With online comparison services like Compare the Market, it has never been easier to look for a better deal on household finances. So next time your provider issues a price hike and asks you to Stay Stay Stay, tell them You’re Losing Me.

Don’t let the Cruel Summer turn into Forever Winter

Energy bills have been shockingly high this year but government rebates are taking out some of the heat. It’s worth doing a quick check to make sure you’re getting the help you are entitled to.

In Queensland, for example, eligible vulnerable households could be receiving as much as $700 in a Cost of Living Rebate this year. That’s enough to make a huge difference, particularly after the Cruel Summer we’ve just had.

Remember bills aren’t Timeless

Various services offer generous discounts for early payments, while others will penalise you for being a Foolish One and not paying by the deadline. So don’t leave your payments to Midnights.

Pay less for Gasoline

It isn’t cheap to fuel a Getaway Car with fuel prices hitting record highs in recent months. Comparing stations before you depart on your journey can make a big difference. Rachel, a friend of mine at Compare the Market, saved $291.88 in a year by using the Simples App to track down cheaper prices. 

Buy Nothing New

These days, most of us receive more emails than we can count for some new sale from a certain shop. Always consider whether it’s something you really need. Is it on your to-do list? If not, then it could be leaving a Blank Space in your bank account.

What’s old is back in Style

The Australian Fashion Council reckons we buy 56 new pieces of clothing a year. To save, try heading to your local op shop, swap with friends or try selling your old clothes online to raise funds.  Vintage shopping Hits Different!

Clean out your auto-fill

It’s all too easy to hit the ‘purchase’ button without thinking twice when shopping online. The fix? Break up the Love Story you’ve created between your card details and auto-filled checkout systems.

Having to enter your details manually and forcing yourself to slow down may be the opportunity you need to realise it may not be a smart financial choice.

Don’t let vampires create Bad Blood

Kettles, TVs, game consoles and phone chargers all use power - even when you’re not using them – as long as they’re on at the wall. The expert energy team at Compare the Market found switching off ‘vampire appliances’ could cut your electricity usage by as much as 10 per cent. Long story short, Australians could be wasting as much as $142 across the year, just by leaving things switched on.

It’s time to go, streaming services

According to research from Compare the Market, many of us have been telling the streaming giants We Are Never Ever Getting Back Together, with an increase in Australians cutting back on streaming services over the past 12 months.

If you’re intent on hanging on to your favourites, check to see if there are any discounts for paying in bulk – some companies will offer lower prices if you lock in for a year.

There are plenty of ways you can swiftly boost your budget and become a saving SuperStar.