Higher Interest Rates May Upend Long-Held Assumptions on Building Wealth
A structural shift in interest rate levels may be underway, which could impact building wealth. This would extend beyond the next Reserve Bank of Australia (RBA) rate decision.
The RBA recently raised the cash rate, and while this wasn't a surprise, it has left ordinary Australians facing persistently high inflation and rising mortgage payments.
In a longer-term view, the current cash rate of 4.60% is slightly below the average between 1990 and 2019. However, with low rates during the pandemic distorting the view of 'normal' interest rates, this may be changing.
The four assumptions worth revisiting in a sustained higher rate environment are: gearing your way to wealth, cash being trash, buying bonds when yields are high, and the role of bonds in an investment portfolio.