By Jonathan Nel Technical Head of Life and Invest GrowthHouse
Interest rates have been a top concern for everyone, from households to businesses. Over the past few years, the rising cost of living and the higher cost of debt have squeezed budgets, leaving little room for non-essentials. Now, central banks worldwide, including the South African Reserve Bank, are reducing rates after a cycle of hikes aimed at controlling inflation. As rates decrease, it is worth exploring what this means for your investments and your overall financial wellbeing.
How lower rates impact different investments
Simply put, when interest rates drop, the cost of borrowing money from banks decreases, freeing up disposable income that was previously spent on debt repayments. This can boost consumer spending, raise business profits, and create more jobs, all of which may positively affect your investments. Here’s how each type of investment is impacted:
- Cash: Lower interest rates typically mean lower returns on cash investments because banks offer less interest when borrowing cost decreases
- Bonds: Bond prices tend to rise as interest rates fall. Investors seek the higher returns these bonds offer compared to the market, creating an inverse relationship between rates and bond values.
- Equities: Lower interest rates tend to support investments in shares (equities), especially in sectors where reduced borrowing costs lead to higher earnings. The impact varies by sector, however; consumer goods may benefit, while banks could see narrower margins.
- Listed property: Reduced borrowing costs also benefit property companies, as lower debt expenses enhance their profitability and drive demand in the property market.
GrowthHouse is here to help you navigate market changes and can assist you in keeping your investment strategy aligned to your long-term goals. As your financial home, we guide you in making informed choices for both stability and growth, regardless of market conditions.
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