Upgrade to shares, RBA tells savers

AgH20 · Nov 7, 2012

RBA Head honcho Glenn Stevens says to people (retirees): Get into riskier investments

It is a longish post but worth reading.

http://afr.com/p/national/economy/upgrade_to_shares_rba_tells_savers_PcuN1r6AX1ykEOLM1nYmRI

The Reserve Bank of Australia has signalled that interest rates are so low investors should shun low-earning term deposits in favour of riskier assets such as new housing and shares.

The central bank's board left the official cash rate at 3.25 per cent yesterday and suggested there were signs the equivalent of six interest rate cuts over the past year were starting to revive the economy.

While retailers, builders and industry groups bemoaned the decision, the Reserve Bank made it clear it sees monetary policy as loose enough to prompt borrowers into taking on more risk.

Reserve Bank governor Glenn Stevens said past rate cuts were "starting to have some of the expected benefits", including a stronger housing market and higher stock prices.

"Interest rates for borrowers have declined to be clearly below their medium-term averages and savers are facing increased incentives to look for assets with higher returns," he said in yesterday's statement.

The remarks suggest the Reserve Bank is sensitive to criticism from groups such as self-funded retirees who blame rate cuts for eroding returns on their retirement savings.

The RBA's statement implies that if investors are unhappy about the rates on term deposits they should consider alternatives.

RATES COULD BE NEARING BOTTOM OF CYCLE

The board's statement, which drove the dollar above $US1.04 to its highest price in more than a month, suggests it sees more scope to keep borrowing costs unchanged in coming months. Speculation mounted that official rates are close to or at their lowest level for the current -economic cycle.

The bank cut the cash rate in October by 0.25 of a percentage point, driving down borrowing costs across the economy to what it yesterday described for the first time as "clearly below their medium-term averages".
Reserve Bank deputy governor Philip Lowe last week warned that Australia should not aspire to the very low interest rates set by central banks in the US, Japan and Europe.

The Reserve Bank is loath to find itself in the same position as the US Federal Reserve, which has cut interest rates close to zero and is effectively printing money.

While the Fed's policies are aimed at spurring investment into riskier assets such as shares in order to boost economic growth, people and companies are taking a cautious tack and holding back spending plans.

The head of equities at Aberdeen Asset Management, Robert Penaloza, said that for Australian investors who had been sitting on cash it made sense to begin looking for higher yielding assets.

"They aren't borrowing to put money into the sharemarket this time around so there is little risk of overheating, but people are willing to pay up for defensive assets if there is a decent yield on offer," Mr Penaloza said.

Colonial First State Global Asset Management's senior portfolio manager Naz Ressas said: "One of the unintended consequences of lower interest rates is investors will in their search for yield buy assets regardless of their risk."

BT head of Australian equities Crispin Murray said consumers were in a "very cautious mood", which meant they would maintain high savings rates and were not about to rush out and spend money.

RBA MORE POSITIVE THAN ECONOMISTS

"The RBA has a more positive outlook on how the economy is going than us," Mr Murray said.

"The danger of a stop-start rate cycle [is that it] confuses households and negates the impact of falling rates. Shares have been flat since 2009 really and we hardly think the sharemarket has built up any speculative froth."

Yesterday's decision to keep rates unchanged the first time Mr Stevens has presided over no change in the cash rate on Melbourne Cup day since taking office in 2006 wrong-footed most economists who were counting on a second rate cut in as many months. This would have pushed the benchmark rate to 3 per cent, matching the record low reached after the 2008 Lehman Brothers collapse.

The bank decided against a cut after last week's September-quarter consumer price data showed core annual inflation accelerated to the middle of the bank's 2 to 3 per cent target range.

The Reserve Bank said that further productivity gains would be needed to keep wage-driven inflation low.

Mr Stevens said reports from China showed growth there had "stabilised," the US was enjoying "moderate growth" and at home there was evidence of "ongoing growth" including in dwelling investment.

Rebounding commodity prices

He said there had been a recovery in the prices of some commodities, which the bank highlighted in October when rates were cut. Since the last meeting, prices for iron ore have rebounded above $US120 a tonne after slumping below $US90 in September.

Mr Stevens said the central bank would continue to monitor whether non-mining sectors of the economy were starting to pick up the slack once the resources investment boom peaked next year.

"As this peak approaches, the board will be monitoring the strength of other components of demand," he said.

Despite the decision, acting Treasurer Penny Wong said households with a mortgage were benefiting from previous rate cuts that shaved about $4500 a year off repayments on a standard $300,000 mortgage.

Most economists said they expected the bank to deliver one more rate cut this year, but conceded there was a growing chance of rates staying on hold until at least February. The Reserve Bank does not meet in January.

Commonwealth Bank of Australia senior economist Michael Blythe said the Reserve Bank still faced a juggling act of two competing risks: the ongoing global problems and the need to shift the economy away from its mining dependency, versus its standard inflation-watching brief.

Mr Blythe pointed to the federal government's budget strategy that meant "monetary policy has to do more of the heavy lifting".

"So the risks still lie with lower rates beyond today," he said. "But that policy skew needs a benign inflation backdrop to work properly. So the bar to further rate cuts in 2013 is lifting."

Demand for Debt on the rise: Stevens

Mr Stevens said yesterday that business demand for debt had increased this year, the housing market had strengthened, and share prices had risen in line with markets overseas.

"Further effects of actions already taken to ease monetary policy can be expected over time," Mr Stevens said.

Policymakers at the bank will be paying close attention to tomorrow's labour force data, which economists predict will show a rise in the jobless rate to 5.5 per cent and lacklustre employment growth.

Another factor likely to influence the bank's considerations at its December 4 board meeting will be the Australian Bureau of Statistics' capital expenditure report on November 29, which will be closely scrutinised for signs that investment plans outside the mining industry are beginning to pick up.

Interest rate futures trading late yesterday put the chances of a December cut at about 50 per cent.

Kieran Davies, one of just a handful of economists to pick yesterday's decision, said ongoing market expectations for the cash rate to be slashed to 2.6 per cent were wide of the mark as "such an outcome would require a mild recession".

"The bank seems reluctant to engage in a 'race to the bottom' given the distortions that very low interest rates could create," he said.

Australian Industry Group chief executive Innes Willox said business was hoping for another rate cut before Christmas to lift domestic activity and take pressure off the stubbornly high exchange rate.

Australian National Retailers Association head Margy Osmond said yesterday's decision meant households would return to their "saving over spending mentality".

"Unfortunately, what could have started in October as a dream run into Christmas, now we are likely to see consumers put the brakes on spending again in the crucial lead-up to the holiday season," she said.Jacob Greber and Philip Baker
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Auspm · Nov 7, 2012

I thought the RBA's 'official' rates policy of around 3% inflation would be fine if the banking institutions are offering more on savings?

Is he suggesting inflation is higher than 'officially' reported and to 'protect' your wealth, you need to stop saving and start speculating?

Anyone else see something seriously wrong with this picture?

bordsilver · Nov 7, 2012

Mr Blythe pointed to the federal government's budget strategy that meant "monetary policy has to do more of the heavy lifting".
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As soon as morons like this figure out that monetary policy can't "fix" anything the better. It's a total lie propagated by sham "economists" and vested interests.

CriticalSilver · Nov 7, 2012

If people want to base their retirement financing decisions on the arbitrary and constantly variable decisions of a central bank, then they should be free to exercise that choice.

Likewise for people who want to live free of these bozos!

Yippe-Ki-Ya · Nov 7, 2012

lol- what a bunch of muppets

Dogmatix · Nov 7, 2012

Auspm said:

I thought the RBA's 'official' rates policy of around 3% inflation would be fine if the banking institutions are offering more on savings?

Is he suggesting inflation is higher than 'officially' reported and to 'protect' your wealth, you need to stop saving and start speculating?

Anyone else see something seriously wrong with this picture?
Click to expand...

I read somewhere that the RBA left rates on hold due to inflation that the RBA said was caused by the carbon tax. I'm not sure if that is correct, but if it is, then that is an imbecilic decision - because the carbon tax is supposedly a one-off hit to inflation, not ongoing like other inflationary pressures.

If harvey norman offered 50% off iphones for a month, would that constitute a deflationary reaction from them too?

Just when you think they might have a clue, they go and ruin your faith all over again.

elykneros · Nov 7, 2012

Dogmatix said:

Auspm said:

I thought the RBA's 'official' rates policy of around 3% inflation would be fine if the banking institutions are offering more on savings?

Is he suggesting inflation is higher than 'officially' reported and to 'protect' your wealth, you need to stop saving and start speculating?

Anyone else see something seriously wrong with this picture?
Click to expand...

I read somewhere that the RBA left rates on hold due to inflation that the RBA said was caused by the carbon tax. I'm not sure if that is correct, but if it is, then that is an imbecilic decision - because the carbon tax is supposedly a one-off hit to inflation, not ongoing like other inflationary pressures.

If harvey norman offered 50% off iphones for a month, would that constitute a deflationary reaction from them too?

Just when you think they might have a clue, they go and ruin your faith all over again.
Click to expand...

Does this mean the RBA will have to print an extra $1M to pay the fine for blaming the Carbon Tax without providing irrefutable proof that it is the sole cause?

hawkeye · Nov 7, 2012

The remarks suggest the Reserve Bank is sensitive to criticism from groups such as self-funded retirees who blame rate cuts for eroding returns on their retirement savings.
Click to expand...

What a dilemma? Move IR's in favour of retirees to the disadvantage of the mortgage belt or vice versa.

Someone always loses when you manipulates interest rates.

Many of those retirees probably benefited from having rates manipulated lower in the last couple decades. There's irony for you.

thatguy · Nov 7, 2012

Can hear the clippers now

hiho · Nov 7, 2012

he is a banker after all?

GoldCash · Nov 7, 2012

Auspm said:

I thought the RBA's 'official' rates policy of around 3% inflation would be fine if the banking institutions are offering more on savings?
Click to expand...

Several banks offer over 5% in savings accounts. That's pretty good.

grinners · Nov 7, 2012

GoldCash said:

Auspm said:

I thought the RBA's 'official' rates policy of around 3% inflation would be fine if the banking institutions are offering more on savings?
Click to expand...

Several banks offer over 5% in savings accounts. That's pretty good.
Click to expand...

5% (- 37% to tax) - 3% inflation = 0.15%

REDBACK · Nov 7, 2012

Austrian banks are offering .05% return on savings!!

GoldCash · Nov 7, 2012

And German Treasuries are offering -0.01%

AngloSaxon · Nov 7, 2012

Dogmatix said:

Auspm said:

I thought the RBA's 'official' rates policy of around 3% inflation would be fine if the banking institutions are offering more on savings?

Is he suggesting inflation is higher than 'officially' reported and to 'protect' your wealth, you need to stop saving and start speculating?

Anyone else see something seriously wrong with this picture?
Click to expand...

I read somewhere that the RBA left rates on hold due to inflation that the RBA said was caused by the carbon tax. I'm not sure if that is correct, but if it is, then that is an imbecilic decision - because the carbon tax is supposedly a one-off hit to inflation, not ongoing like other inflationary pressures.

If harvey norman offered 50% off iphones for a month, would that constitute a deflationary reaction from them too?

Just when you think they might have a clue, they go and ruin your faith all over again.
Click to expand...

The carbon tax rate is meant to go up every year until 2015 isn't it? They may have changed that of course.

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