Welcome to the first of our quarterly newsletters.

Our goal is to provide you with timely, practical and succinct commentary on issues impacting your wealth creation and investments. Not to add to the financial crystal ball gazing conducted by the media and various online gurus.

If we stray from this goal or fail to meet it to your satisfaction, please provide us with feedback.

Interest Rates and Inflation

This is where the aforementioned crystal ball gazers have been having a field day. Nothing gets them quite as excited as the prospect of changes to monetary policy. Why? Because it creates uncertainty (or fear), which sells papers (or clicks).

A couple of things to remember about rates:

  • rates are the cost of debt. The more debt you own, the more sensitive you are to rate moves;
  • rates up, asset prices down and vice versa (all else being equal);
  • rates are a tool used by central banks (e.g our RBA) to manage economic activity (measured by inflation and unemployment rates);
  • economic activity in the future is very difficult to predict and can change quickly;
  • expectations of rate movements can be as powerful as actual rate moves.

Recent inflationary pressures have caused central banks to foreshadow future rate rises. The problem is rates are a demand side lever. While the cash accumulated by households and businesses during the Pandemic has caused a demand spike, much of it is being saved (e.g used to repay debt). The main cause of current inflation has been supply constraints caused by shut-downs, shipping snags and, more recently, the Ukraine conflict. All of which could resolve quickly, or not.

Therefore, higher rates may not solve the inflationary problem. We could just end up with lower economic activity (“stagflation”). Which is bad. By setting expectations of rate rises early, central banks are keeping a lid on the demand side while supply (hopefully) catches up and prices stabilise.

The Ukraine Conflict

The Russian invasion of Ukraine has caused further supply shocks in resources and commodities. While adding to inflationary pressures in the short-term and tragic for the human beings involved, from a long-term global economic perspective, probably not that big a deal provided the conflict remains contained to the Ukraine. It may even force positive change in the long run e.g by diversifying Europe’s energy sources.

Investment Markets

By changing the risk-free rate (e.g 10yr government bond yields) and the cost of debt, interest rates impact asset prices. For an explanation of why share prices move when rates move (or are expected to move), see my article: here.

As economic activity ebbs and flows and rates, eb and flow with it, valuations change but quality assets remain and continue to generate cashflows.

Having inflated during record low rates and, in the case of technology stocks, expectations of Covid driving structural changes in demand, shares and property valuations have corrected as rate rises became expected and the effects of the Pandemic receded.

Much has been made of the interest rate effect. Not enough of the effect of the Pandemic receding, in my view. Remove technology stocks from the equation and you have a very modest correction indeed and sound earnings growth.

We were always sceptical that Covid would drive long-lasting changes in demand. Hence our call to limit your portfolio’s tech exposure from late-2020. While this call missed a little upside, by focusing on a diverse range of high-quality assets, it has insulated you well from the correction and positioned you for growth as the post-Pandemic recovery takes hold.

In our view, holding a diverse range of quality assets for the long term will grow your wealth far more effectively than listening to the crystal ball gazers and trying to time markets.

The Federal Budget

The following are the key measures impacting wealth accumulators and retirees in the 2022 Federal Budget:

Personal taxation

  • Cost of living tax offset: The Low and Middle Income Tax Offset (LMITO) will increase, providing an additional $420 to reduce tax payable for those earning up to $126K pa. in the 2021/22 financial year. However, LMITO was not extended, meaning it will not apply for the 2022/23 or later financial years.
  • Halving of fuel excise: For six months from 12:01am 30 March 2022, the excise on fuel and petroleum-based products will be halved (22.1 cents per litre).
  • Indexation of the Medicare Levy thresholds: The Medicare Levy low-income thresholds have been increased for singles, families and seniors.

Home ownership

Affordable housing measures: The First Home Loan Deposit Scheme and Family Home Guarantee allow eligible individuals to purchase a home with as little as a 2% deposit, and the Government will guarantee the loan, removing the need for lenders mortgage insurance. Special categories have been created for single parents and regional home buyers.


Continuation of the reduced minimum pension drawdown: The budget proposes to extend the 50% reduction to the minimum amount that needs to be drawn from superannuation pension accounts to the 2022/23 financial year.

Social Security

  • Cost of living payment: Eligible social security recipients will receive a one-off $250 payment in April 2022. Eligible payments include the Age Pension, Disability Support Pension, Carer Payment and Allowance, JobSeeker Payment (and equivalent DVA payments), as well as individuals holding a Pensioner Concession Card or Commonwealth Seniors Health Card. Like previous relief, the payments will not be means tested and will be tax-free.
  • Paid parental leave changes: Parental leave pay is proposed to be combined with Dad and Partner Pay resulting in a single scheme of up to 20 weeks leave which can be shared between parents as they see fit.
  • Lowering the Pharmaceutical Benefits Scheme (PBS) safety net: From 1 July 2022, the PBS safety net will come into effect earlier.

Campbell Korff

Sources: www.budget.gov.au

Korff Wealth is a Corporate Authorised Representative of InterPrac Financial Planning Pty Ltd ABN 14 076 093 680 Australian Financial Services Licence Number 246638, Level 8, 525 Flinders Street Melbourne VIC 3000

Disclaimer: The information and articles in this newsletter are of a general nature only and are not to be taken as recommendations as they might be unsuited to your specific circumstances. The contents herein do not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. InterPrac Financial Planning Pty Ltd directors and advisers may have investments in any of the products discussed in this newsletter or may earn commissions if InterPrac clients invest or utilise any services featured. Your Financial Planning adviser or other professional advisers should be consulted prior to acting on this information. This disclaimer is intended to exclude any liability for loss as a result of acting on the information or opinions expressed.