Interest rates and your super
Across the globe, long and short-term interest rates have begun to rise from near historic lows. As excess capacity in the global economy diminishes, we expect interest rates to continue to increase gradually, with the US leading the way.
In the US, investment markets have been grappling with the prospect of more material increases in US interest rates since the start of 2017. At times this has impacted share market returns. Strong economic growth, including healthy labour market conditions and inflation that is near the US Federal Reserve’s (Fed)’s 2% medium-term objective prompted the Fed to raise interest rates again on 13 June 2018. The Fed also updated their expectations for future rate increases, implying a slightly faster pace in the period ahead.
The European Central Bank (ECB) has recently announced plans to moderate its additional economic support. While inflation is expected to increase in the near-term, the ECB remains sensitive to political risk in Italy and is likely to reduce stimulus very gradually.
Meanwhile, in Australia, the Reserve Bank (RBA) has kept the cash rate on hold at 1.5% for some time. Importantly, in their latest Minutes they did not state if next move would be either up or down. Prospects for a US led trade war remain a key focus for markets.
Rising interest rates, led by the US, are expected to have a cooling effect on global growth. While we anticipate that the global economy will continue to grow, we expect the pace of growth will continue to slow towards the end of the year. That said, we are not expecting a sharp slowdown in growth.
What does this mean for your super?
The target portfolios of the diversified options, including the Growth (Cbus MySuper) option, have a small overweight exposure to growth assets such as shares to reflect expectations of positive economic growth over the next few years.