Rise to the occasion: how to keep rate anxiety under control

Interest rates underpin everything in financial markets.

?But many investors may have forgotten that fundamental fact in the easy-money years post the 2008 global financial crisis (GFC) when rates were held super low and even below zero for a time.

?As the recent turmoil in the US banking sector has shown, however, interest rates still matter, especially during a period of rapid change.

?The collapse of three US banks – including the 16th largest in the country, Silicon Valley Bank (SVB) – in the space of a week or so and speed wobbles at the globally significant financial institution, Credit Suisse, have all been linked in part to the sharp rate hikes served up by central banks over the last 12 months.

To be fair, idiosyncratic risk management factors at all of the banks currently under pressure also played an important role in the dramatic events of the previous couple of weeks.

Central bank intervention has hosed down fears of systemic contagion of the sort witnessed during the GFC but nerves, and markets, remain frazzled.

Many observers also expect monetary authorities to ease the path of predicted rate hikes following the recent US bank chaos.

For instance, the US Federal Reserve was widely tipped to raised rates by 0.5 per cent prior to the SVB meltdown compared to current odds that point to a 0.25 per cent hike, a pause or even a cut.

Second-guessing rate decisions remains a difficult game, though, with ‘sticky’ high inflation still bothering central banks, including our own.

In a statement released on March 7 following the latest 0.25 per cent increase in the official interest rate, Reserve Bank of Australia (RBA) governor, Philip Lowe, noted the central bank “expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary”.

Lowe said the RBA would be watching global economic factors as well as local trends such as household spending, inflation expectations and labour market data: strong Australian employment figures released later in March do not help the case for monetary easing.

For the time-being, higher rates (that may or may not be at peak) and inflation are the main influences on everything from government budgets, business and personal spending to investing.

While the new rate dynamic is creating uncertainty and volatility, panic is not a good portfolio management, or life, strategy.

?Seek professional financial advice if the higher-rate world is rattling you: good planning underpins long-term financial success.