Trump win could lift interest rates

World sharemarkets have responded positively to the Trump election victory which, if sustained, is excellent news for balanced and growth super fund investors.

The expectation of a boost to US economic activity from higher infrastructure outlays and possible changes in US trade policies is strengthening the markets.

It's too early to reach definite conclusions about the impact of the change in US government on the world economy. However, financial markets are still confident that the Federal Reserve will at long last increase the official short-term interest rate because of the strengthening US labour market.

In this event, the chances of a further reduction in the Australian cash rate of 1.5 per cent will be greatly reduced and the next move could even be an increase, depending on US developments.

For investors suffering from historically low fixed-interest returns, the recent increase in international bond yields associated with the Trump victory provides an early ray of hope. Nevertheless, the Reserve Bank has a vested interest in keeping Australian interest rates as low as possible, despite the continuing upwards pressure on house prices in Sydney and Melbourne.

A stronger US currency after the election has resulted in a weaker Australian dollar but it's still higher than the level needed to assist our struggling manufacturers.

Overall, the possibility of a sudden sharp rise in Australian interest rates isn't high and is unlikely to occur while our major banks are still able to obtain short-term capital from overseas investors attracted by our relatively high cash rate and AAA credit rating.

In the medium term, the financial stability of our banking system and retention of the AAA credit rating will be key factors determining how quickly interest rates increase, if at all. Even if the official rate were to increase by 1 per cent to 2.5 per cent, the impact on investors whose interest payments are tax-deductible would be minimal.

Owner-occupiers funding their interest payments out of after-tax income are well placed to cope with modest increases in the cash rate. Existing borrowers are using the opportunity provided by falling interest rates to repay their debts more quickly than required.

Changes in the banks' lending arrangements are also forcing new borrowers to provide larger deposits to obtain their loans, while heavily committed borrowers are being assisted by the widespread availability of fixed-interest loans at attractive rates.

This availability of fixed-rate loans could change quickly, however, if US interest rates rise and the US dollar continues to strengthen. For this reason, both owner-occupiers and investors concerned about their debt-servicing commitments would be well advised to check out whether now may be the time to convert part or all of their borrowings to fixed- interest loans.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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