Interest Rates Stay on Hold for February 2020

The Reserve Bank of Australia (RBA) has left the official interest rates on hold at it’s first meeting for 2020 today.

The cash rate decision comes at a time when the bushfire emergency and coronavirus outbreak weighs heavily on the Australian economy.

Improved employment data likely buoying the reserve bank’s outlook, even though economic growth has remained subdued.

This means the cash rate remains at 0.75% for the time being. As we have previously outlined, the cash rate is likely to remain “lower for longer” as inflation around the world has remained at stubbornly low levels.

Fintech Financial Services believes that it is unlikely that this will be the end of the RBA’s successive cuts (0.25% cut in the months of June, July and October 2019). Prior to October last year the RBA held the official cash rate at 1.50% for 30 consecutive months. The recent natural disasters, including droughts, floods and bushfires and the economic ramifications of the coronavirus outbreak make another cut in the near future likely.

With the economy a long way from the RBA’s full employment and inflation objectives, the bushfires likely to slow growth in the short term and the China coronavirus posing a new threat to global growth and tourist arrivals, the RBA had many reasons to cut rates at today’s meeting.

Going forward, the RBA is also likely to be considering the impact that another cut could have on consumer confidence, which has been down; given that the general public can perceive this as a message that the economy is going badly and we are in for tough times ahead. However, this is more due to the bank’s inability to communicate its intent.

Deloitte Access Economics reported in their Business Outlook in January that there’s a large gap between what the RBA is saying, and what families and businesses are hearing. The RBA is boosting the economy both because it is weaker and because it is different. The first factor on its own is a concern for families and businesses, but the second, a different economy with more profits and more jobs – but less in terms of wages growth – is actually a mixed blessing.

If the next rate cut occurs as expected, it will bring the official rate cash rate to 0.50%, just a single cut from the point where RBA Governor Philip Lowe has said he would consider instituting a Quantitative Easing program (printing money). With the Australian economy now beset on all sides, it seems likely that there will be another cut soon.

This means that those holding Cash at bank or in Term Deposits to generate income, are going to find it even harder to maintain their income needs and lifestyles as a consequence.

This also means that investors will continue to look for ways to earn higher levels of income from other sources like dividends from Shares, rents from Property & Infrastructure and returns from higher risk Mortgages and Debt Instruments like unsecured Corporate Bonds. These assets class types have been pushed higher over the past 2 to 3 years as sustained low interest rates have created a ‘yield chase’ scenario. Some of these investment types are looking fully value or sitting above fair value as a result.

Therefore, it is very important for your portfolios, not only to be in line with your ‘Investment Risk Profile‘ and the reasons / objectives why you are investing, but to be made up of individual investments that represent ‘fair valuation’ or better, and utilise the leading investment research houses to deliver this to clients.

Please contact us if you would like to discuss this in relation to your specific circumstances.
Grant