Interest rates continue to rise, but how high will they go?

The bank has also hinted that they would prefer to move in 50 basis points steps. This begs the question as to how far rates will go.

There are two very different viewpoints as to what the future may look like.

I hear claims that after a year or so inflation will turn negative and the bank will start reducing rates again.

My view is the opposite and, given the historical unreliability of any economic forecasts, I'll share my reasoning now.

First, consider the way the Reserve Bank is thinking. They are well aware they screwed up badly by cutting rates far too low, and then leaving them down far longer than was appropriate. And the bank never wants to be seen as making ad hoc decisions based on short-term data.

So it is likely the bank will stop moving rates once they are satisfied their target has been reached, and then sit on their hands.

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Second, a major cause of inflation is electricity prices. Speak to anybody in the industry and they will tell you that the electricity crisis will not be solved easily and may last for years.

Third, there are the shortages caused by the war in Ukraine. It was all gung-ho at the start, with predictions that Putin would give up easily and crawl back into his bunker. As is now becoming clear, this was never going to happen, and Putin's position looks stronger than ever.

Russia has already destroyed 95 per cent of Ukraine's critical infrastructure and taken complete control of eastern Ukraine. This means Putin is controlling the flow of gas to Europe, which is likely to force them into recession as winter comes. As a result, they are losing their appetite for sanctions on Russia.

There will be no quick solution here - expect a long campaign, and the shortages caused by the war to continue.

Fourth, think about inflation caused by wage increases. Workers have never had it tougher. Power bills are skyrocketing, petrol is taking an ever bigger chunk of their income, bills are increasing, and now they are copping a pounding with increasing mortgage repayments.

Let's say inflation is 7 per cent. Even if the average worker gets a massive 7 per cent wage increase, to keep up with inflation, tax will take 32.5 per cent of that increase. So they will only have a real increase of 4.7 per cent in their pocket, and they are still worse off. Of course they will fight for wage increases.

Finally, another major inflationary driver is the building industry. Shortages of supplies and skilled workers are getting worse and worse, and builders are going broke all over the country.

If you tot up the jobs that are remaining unfinished due to builder bankruptcies, and all the work that needs to be done to fix fire and flood damage, it's obvious the building industry will continue to be in huge demand in the next few years. And it's not just the building industry struggling: throughout the world, staff shortages are at unprecedented highs.

Many restaurants and holiday resorts are now forced to curtail the number of clients they can accept, because there are not enough staff available to provide the services. Does anyone seriously think that all these workers will suddenly reappear in a year or so?

If you put all this together, I see no reason to suggest things will be back to normal in a year or so.

My view is that the Reserve Bank will keep raising rates until they reach 4 per cent, and leave them there for quite a long time.

This is not the time to be complacent: take a good look at your finances and put safety buffers in place to safeguard your position for what lies ahead.

Question

I started reading your books in 1995 when I was a single mum and now I am very comfortable financially. I'm now 61 and plan to retire at the end of the year.

I have a good superannuation fund and $145,000 worth of good shares that I bought with a margin loan. The loan is now $69,000. Is it better to sell my shares and add them to my super or keep going as I am. I have a $49,000 loss in my tax from years back.

Answer

Congratulations on what you've achieved. I think disposing of the shares and contributing the proceeds to super is a good idea, especially if you have capital losses available to mitigate any capital gain that you may have on those shares.

If you are still employed and on a reasonable income, you may wish to use part of the proceeds to make a tax-deductible contribution to super. You are allowed $27,500 a year less whatever contribution your employer has made for you.

Question

I understand that most superannuation balances have taken a hit in the last few months. I am 70, my wife is 62 and our only asset is $225,000 in superannuation.

We have no other property or assets. I don't want to risk losing any more of my precious superannuation, so should I put the money into a bank account for safekeeping?

Answer

I appreciate that these can be nerve racking times, but a good superannuation fund having fallen should eventually recover. You should be getting 50 per cent of the adult couples pension, which at least will be providing some income for you.

I would try to draw as little as possible out of my superannuation until the market recovers. I know that it's important to sleep well at night, so maybe one way out is to transfer possibly a third of your superannuation to the cash option inside your superannuation fund, to tide you through until the market recovers.

Question

How do you balance paying off a mortgage, investing in shares, having some savings and spending for fun?

Answer

Samuel Johnson once said "A man who both spends and saves money is the happiest man, because he has both enjoyments".

I have never recommended a spartan lifestyle - the way to financial success is to do a budget, making sure your essential expenditure items are the first to be allowed for.

It is really then a matter of adjusting your habits for what money is left over. The great thing about Australia is that many of the best things are free. These include beach and bush walks, libraries and many other free attractions.

Question

I have a question about eligibility for the Commonwealth Seniors Health Card (CSHC). We are a retired couple, both over 67, and our understanding is that the value of our combined financial assets such as superannuation shares and bank accounts are subject to deeming for the income test for the card.

Am I correct in thinking that any actual dividends are not added to the deemed income when working out eligibility, even though they are part of our taxable income?

If the dividends are not part of our deemed income, how will my extra casual income of $5000 a year be treated?

If our combined income from superannuation shares and bank deposits is over $90,000, and my earned income is $5000, I would be over the limit of $92,416, which I understand is the cut-off point for the card.

Answer

Your assumptions are not all correct. The card is not asset tested, just income tested.

The test is your Adjusted Taxable Income (ATI) plus deemed income from any superannuation assets from which you are drawing a pension. For example, if you had no superannuation in accumulation mode, and had $3 million in superannuation in pension mode, the deemed income from that would be $65,628 a year.

Your ATI does not include pension income from superannuation, but merely your combined income from investments outside superannuation.

Keep in mind that Labor has promised to increase the income threshold for singles from just under $58,000 a year to $90,000 a year and for couples to $144,000 a year. These new limits are supposed to take effect from July 1, 2022 but the changes are not yet legislated.