It’s no secret that interest rates are already at rock-bottom levels. Ever since the Reserve Bank of Australia (RBA) started cutting rates from the last peak of 4.75% we saw back in 2011, savers and retirees have been punished with an avalanche of interest rate cuts to ever lower ‘record lows’. Those were only exacerbated in 2020. The RBA quickly lowered the cash rate in response to the coronavirus pandemic. We had 1.5% back in February (which was the then-record low). But today, we sit at 0.25%, our new record low.
We as Australians have never before seen or invested in this kind of brave new world. An interest rate of 0.25% has translated into term deposits and savings accounts yielding interest rates not much better than inflation.
But according to reporting in the Australian Financial Review (AFR), things could be about to get a whole lot worse for savers.
Down, down for interest rates and the RBA
According to the AFR, Westpac Banking Corp (ASX: WBC) chief economist Bill Evans is now predicting that the RBA will cut the cash rate to yet another record low of 0.1% when it meets on the first Tuesday of next month. Westpac is also predicting that the RBA will continue to target government bond yields at the new 0.1% rate.
Mr Evans explained Westpac’s prediction with the following:
It is the medium term projection that the unemployment rate is still likely to be around 7 per cent by the end of 2022 – the [RBA] Deputy Governor refers to a “slow grind” – and that the shortfall in demand will be a significant break on the recovery… That outlook is unlikely to change in the November forecast revisions, hence no real case can be made to ‘wait’.
So basically Mr Evans is saying that the economy is unlikely to recover to ‘full-employment levels’ by the end of 2022 (using the RBa’s own projections). As such, there’s no reason for the RBA to wait in cutting rates.
What would 0.1% mean for savers and investors?
A cash rate of just 0.1% would mean real (inflation-adjusted) interest rate returns you could expect from cash investments like bonds and savings accounts would likely be negative. Even today, Westpac itself is offering an interest rate of 0.8% per annum on a 2-year term deposit. If inflation managed just 1% over the next 2 years, your money will actually be going backwards, even today.
So if rates do head to 0.1%, these kinds of yields will get even worse. It’s not good news for savers, retirees, or anyone else who likes the certainties that a cash investment can bring.
In contrast, ASX share investors will likely be cheering a move to 0.1%. Lower interest rates tend to support share markets, partly because it reduces the appeal of other asset classes (like cash). This phenomenon has come to be decribed as TINA – There Is No Alternative.
Whatever happens, this discussion is just another reminder that we are living in strange times indeed.