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.