“If interest rates keep going down pensioners are going to be tempted to go into the equity markets and I don’t think that’s necessarily a good thing when you’re on a pension to rely on equity risk and dividend.” ANZ CEO Mike Smith
Readers will remember that last week YieldReport reported on Glenn Stevens’ comments that generating enough retirement income in a world of historically low yields would be a ‘nontrivial’ challenge. “The key question is: how will an adequate flow of income be generated for the retired community in the future, in a world in which long -term nominal returns on low-risk assets are so low?” he asked.
The RBA may have made that job even tougher by cutting the cash rate last week by a further 25bps to 2.00%, an historical low for Australia. Reactions to the rate cut were as strong as they were predictable, with some criticising the cut as an ‘own goal’ because it left the impression there would be no more rate cuts.
Australia’s media has been clogged with strong opinions from industry leaders. ANZ’s CEO Mike Smith has told the RBA that it should put a hold on any more rate cuts, saying that it could ‘tank the economy and that a higher AUD was just “something we are going to have to live with”. He went on to say, “If you can keep your ammunition, or your powder, dry it does help because if you look at many other countries they have nothing left so it’s the last chance and it’s always good to have a bit of reinforcement in reserve,” Smith told News Ltd. More worryingly he points out that, “If interest rates keep going down pensioners are going to be tempted to go into the equity markets and I don’t think that’s necessarily a good thing when you’re on a pension to rely on equity risk and dividend.”
Annette Beacher, chief Asia-Pacific macro strategist for TD Securities said, “Today’s cut is not only a waste of a bullet, it has the potential to merely exacerbate the existing imbalances in the economy.” Meanwhile Bill Evans, Westpac chief economist said, “This is clearly the market response to the final paragraph which signals an end, at this stage, to the easing cycle.”
Stephen Walters, JP Morgan chief economist said the cut was “to get the unco-operative Australian dollar to behave … But the unit is trading more than half a cent higher since the rates announcement, so the plan hasn’t worked out too well thus far.” Paul Brennan and Josh Williamson, Citi economists said, “The RBA has tried to signal confidence in the economic outlook with references in the statement to ‘encouraging trends in household demand’ and ‘stronger growth in employment’, but it still cut rates based on the opportunity provided by the inflation outlook… This suggests to us that the next live meeting will be August following the second quarter inflation result. We suspect the RBA then will likely face the same issues it is grappling with now; still below trend economic growth and low inflation, which would see the bank reluctantly cut again to 1.75%.”
Alan Oster, chief economist at NAB, said, “What they said was factually true – that there are some green shoots out there – which is why we thought they would delay the cut …If you want to boost confidence, I’m not sure that’s the way to do it… if they were trying to lower the currency, then that was an own-goal.” Capital Economics said, “The cut in interest rates to a new record low … is unlikely to be the last in this cycle. Our forecast that both GDP growth and underlying inflation will be weaker this year than the RBA expects suggests that rates could yet fall to 1.5% by December. That could prompt the dollar to weaken from US$0.79 now to around US$0.70.”