• Is now the time to rebalance portfolios towards the highest quality company names that have been left behind by the rally? Read here.

How record low interest rates have changed investing

19072019_rate cut

How record low interest rates have changed investing

For 20 years before the GFC, the RBA cash rate averaged 6 per cent; now it’s 1 per cent. This ‘new normal’ is great for borrowers, but a disaster for savers. And it’s driving investors to take increasingly greater risks.

In this blog, I have analysed selected minutes from the RBA meeting of 7 April 2009 – in the middle of the GFC – when the RBA cash rate was cut to an emergency low of 3.0 per cent, with selected minutes from the RBA meeting of 2 July 2019 – when the cash rate was cut to 1.0 per cent.

At the meeting of 7 April 2009, RBA Governor Glenn Stevens cut the cash rate by 0.25 per cent to an emergency low of 3.0 per cent. Selected minutes of the meeting read: “The economic data released over the past month indicated that the sharp decline in output recorded in many economies in the December (2008) quarter had probably been repeated in the March (2009) quarter. Output in Australia’s trading partners, weighted by their share in world GDP, therefore appeared likely to have declined by around 3 per cent over the year to the March (2009) quarter. Revised forecasts from the international agencies such as the IMF and OECD now showed an expected fall in output in 2009, for the first time in at least 60 years”.

At the meeting of 2 July 2019, just over a decade later, RBA Governor Philip Lowe cut the cash rate by 0.25 per cent to 1.0 per cent. Selected minutes of the meeting read: “Accommodative monetary policy, strong public demand, a renewed expansion in the resources sector and growth in exports were all expected to support a return to GDP growth to trend over coming years….Employment growth has continued to remain strong, at 2.9 per cent over the year to May (2019).  Some of the additional labour demand had been met by an increase in the participation rate, which had reached its highest level on record.”

Like most Central Banks, the RBA is yet to understand the shift in technology, globalisation, demographics and confidence. Overall, “savers” are feeling the counterproductive measures from the record low 1.0 per cent cash rate, and the Reserve Bank’s obsession with a 2-3 per cent inflation target. Australian households as a group have roughly similar levels of deposits and loans, and so rate cuts applied equally are simply robbing savers to pay borrowers.

Many Central Banks have been ineffective in lifting inflation levels. For example, today you can pay Euro 102.64 to acquire a Federal Republic of Germany Government Bond maturing on 15 August 2029 when you receive Euro 100. That is an annual yield-to-maturity of negative 0.26 per cent, and you receive nil interest on your investment over the ten years.

The pain, particularly for retirees, will continue as the RBA promotes “dissaving” – as every additional rate cut unleashes another wave of selling safe assets to purchase riskier ones.


Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE


find out more



  1. Thanks David for an informative article

    Could it be also put??…

    ‘Rate cuts applied equally are simply robbing savers to (save) borrowers and the wider economy

    • Yes John, savers are subsidising borrowers and those pockets of the economy that “wouldn’t normally make it” in a higher interest rate environment.

  2. Hi David,
    Great article. In light of current events and the potential in future for ZIRP followed by QE here in Australia, does this change the mindset of the Montgomery Funds’ attitude towards gold as a hedge against devaluing currencies globally? Just yesterday Ray Dalio came out in support of gold in his article titled ‘Paradigm Shifts’ and he makes some very compelling points for the ownership of a store of wealth that sits outside our current fiat system and thus cannot be printed to infinity.

    • Carlos Cobelas

      boy, how many times has that been said about gold over the past 100 years ?
      gold can’t be printed to inifinity, but they keep on digging it up.

      • That’s true, gold is still being dug up but there’s a finite amount of gold on the planet.

      • Carlos Cobelas

        I’m sure they won’t run out of gold mining in our lifetimes, or our childrens or grandchildrens.

      • The rate of gold being dug up is roughly equal to population growth and is therefore sustainable. Central banks can print money like toilet paper

      • andrew ronan

        And the more they print, the more it costs to dig it up because energy, labour and most other inputs rise.
        All this happens at the same time GPT yield is in long term decline( grams per ton) and throw in rising central bank demand, safe haven status, trade wars, negative yielding bonds.
        Investors have no where else left to hide out.
        Gold and silver are entering a long term rise against all fiat currency in my opinion.

Post your comments