Interest Rates

The monetary policy committee did not put up interest rates this week. Good. But people getting income in the form of interest from cash don’t get an income increase. If rates go down, their income goes down. But remember, it is not the banks that pay you this interest. It is those of us folk who have borrowed money from the banks, (or via the reserve bank) who are paying off bonds and cars and education loans, who are paying you this income. We borrow at 10%, the bank gives you, the lender to the bank of your cash, 6%. For example. So, if someone living on interest in all or in part for income, wants the rates to go up, they are wishing it upon their children and friends and the public to pay more on their debt in order to provide more income.

I know I’m writing a bit, what’s the word – my English teacher client will no doubt correct me – obliquely here, but it is good for us to actually understand what the flow of income and borrowing is. If interest rates go down, the consumer pays a bit less for borrowing, thus has a bit more money to spend on consumer products, thus the consumer company makes greater profits, can then choose to increase their dividends to shareholders meaning increased dividend income to the investor. A better method of income generation and income increases.

When interest rates go down, the asset manager can do nothing but reduce the income they pay through to the investor. They cannot absorb the event or somehow keep the income at the same level.