Why rising interest rates could also be good news Scroll

Why rising interest rates could also be good news

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Mark Brighouse, Chief Investment Strategist

Mark Brighouse
Chief Investment Strategist | Email Mark »

22 June, 2022

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Jane Austen praised Mr Darcy not just in terms of his handsome features and “noble mien” (which these days might be termed “aloofness”) but also in terms of his income, which was thought to exceed £10,000 a year. Of course, Mr Darcy did not have to work for that income, it was the rent from his rural lands. It is interesting that in 1803 a person’s income was the defining measure of wealth rather than the value of their assets. Nowadays if you perused a Rich List, you would see people ranked by the estimated value of their shares and properties, not the income those assets produced. The usefulness of Mr Darcy’s substantial estate of Pemberley was in the income it generated, not in the quarterly or annual fluctuations in its value.

When saving for retirement you should think a bit like the characters from Pride and Prejudice. Well, not completely like them, but at least in terms of viewing your wealth from a perspective of its income generation as opposed to its current value in dollars (or pounds for that matter).

This brings us to the issue of the recent increases in interest rates, here and around the world. Starting in mid-2020, expectations of when official interest rate hikes would occur have moved closer and closer and these increases have now started in many countries. This has tended to be greeted as bad news. It does mean that borrowers will no longer enjoy almost zero funding costs, but the prospective income for investors is greatly improved. As interest rates rise, the same nest egg can generate a larger income. Think of your KiwiSaver as a modern-day country estate. It might not have a portrait gallery but its role in keeping you in the “manner to which you have become accustomed” is very similar.

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