Interest Rate Cut

The RBA has announced a emergency rate cut of 25 basis points (0.25%) at a meeting today.

This brings our cash rate to a record low 0.25%.

We expect further announcements today too on their intervention measures to support liquidity in the market.

Funding Costs

Bank funding costs are on the rise and are going up in response to risks.  Offsetting the rate drop is an increase in funding costs.

Like the GFC, as risk enters the financial system so does the premium we place on lending to each other.   This said, Governments and banks learned a lot from this time, and we remain confident that they will keep funding channels well supported over the coming months and we will see these margins erode as risks subside.

The RBA will also provide strong underlying support for the banking system that should help support markets.  More detail to follow on their "QE" programs.

Competition in Banking

We are in a very low yield environment, one of the benefits is the number of new entrants into the debt markets (especially internationally funded ones) that are looking for market share in Australia.

Whilst they will not be reckless with their credit they will eagerly see an opportunity to win market share.

Please see below for some strategies that may be worth considering in these tough economic times.

Money Strategies & Opportunities

Our deepest sympathy to those whose employment or income may be impacted by these events.  

For households, the time is now, if possible, to look at your own financial situation.

• Build Equity
  With interest rates so low and falling, take the opportunity to repay or keep your mortgages at the older (higher) interest rates.  This will both accelerate debt reduction and build a buffer in the event you need to access it.

  One thing seems certain, we will be in a low interest environment for quite some time yet though don't take it for granted!
   

• Superannuation & Investments
  Falling asset prices may be a time to take advantage of the opportunities that may be relevant for your own risk profile. Seek advice of course.
   
• Review & Prepare
  The lack of discretionary spending now, whilst hurting the economy in the short term, is a chance to review your “P&L” and build your "Balance Sheet". This is something that long term thinking economists have been advising households need to do for years.

  In some respects, not being able to spend on discretionary items is forced savings, can you quantify the amount of these and where will it can be directed? 

  It is therefore a great time to create a Budget and/or set some financial goals. There are several on-line tools that can assist so take the chance to improve your financial literacy.

For businesses, the challenges and opportunities will vary from industry to industry.

• Communicate
  If you are having financial pressures, communicate as early as you can.

  Talk to your banking connection, there are already some relief measures being communicated (loan deferral, interest only payments etc.) that could be available. Do this before you breach financial covenants or worst still fall behind on repayments.

  This goes for the ATO too, lodge BAS statements and communicate any financial shortfalls.
   

• Innovate
  We are hearing about stories from our community about how they are innovating their businesses, principally around reaching their customers.  Whilst this may be out of reach for some, talk you people in your industry about ideas to maintain the rage. 
   
• Tax Incentives
  There are some Government incentives for SME's in the form of cash boosts (to offset against employee costs), that may be quite material. In addition, the immediate Asset Write-Off Threshold has been increased from $30,000 to $150,000.  Visit, ato.gov.au or talk to your accountant. 

  The latter I remind is not a cash offset, but a tax deduction.  Whilst it may be tax effective it is important to only buy assets that you really need.

Final Thoughts

For our communities, these hardships will accelerate the innovation and speed of change in our worlds.  

Take technology and the removal of the reliance on face to face connection as one small but significant example. Once businesses make changes and investment into their processes to affect this, they won't be turning back to the "old" ways.

Think about your ability to prosper in that environment.

Our best wishes to you, your families and whatever matters to you.

The Team at MCP
www.mcpfinancial.com.au
enquiry@mcpgroup.com.au