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RBA cuts rate to 1.25pc, ends record run of inertia

Glenn Freeman with AAP  |  04 Jun 2019Text size  Decrease  Increase  |  
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The Reserve Bank has cut the official cash rate to 1.25pc, the first move since they were cut to a previous record low of 1.5pc in August 2016.

On the domestic front, Reserve Bank Treasurer Philip Lowe cited weak inflation, rising unemployment and ongoing falls in house prices.

The move also comes after a surprise drop in retail sales figures, as the Australian Bureau of Statistics today reported retail spending dropped by 0.1 per cent to $27.3 billion last month, after rising 0.3 per cent and 0.8 per cent in March and February.

"The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices," Lowe said.

Though he pointed to strong employment growth over the past year and rising labour force participation, Lowe said the vacancy rate remains high and there are reports of skills shortages in some areas.

"There has been little further inroads into the spare capacity in the labour market of late. The unemployment rate had been steady at around 5 per cent for some months, but ticked up to 5.2 per cent in April.

"The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low," Lowe said.
Globally, he referred to increasing risk from the US-China trade dispute.

"Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries," he said.

Pension-phase retirees should review strategy

Following the movement on rates, which fund manager Plato Investment Managers expects to be the first of two or three cuts this year, retirees should review their income-generating investment strategy.

Don Hamson, managing director of Plato, says rate cuts will see Australian retirees receive less income from floating rate income investment assets.

If further cuts to the cash rate occur this year, he says returns on cash, term deposits and products linked to bank bill rates will also likely continue to fall.

"Many income-related products, like income securities or bank hybrids are priced at a margin to bank bill rates, and we have already seen 90-day bank bill rates fall more than 60 basis points this year, which is already crimping their income.

“Retirees living off cash-linked income will struggle to make ends meet. So, it is very timely for retirees to reconsider their income generating asset mix. Thankfully, given the somewhat surprising election result, retirees can continue to bank on receiving franking credits from Australian share investments," Hamson said.

Income seeking investors 'bear the pain'

“For investors, this means traditional assets that they could previously turn to are no longer delivering the income yield that they once did. Term deposits have also followed the cash rate lower," says State Street's investment specialist, Rafiq Choudhoury.

“Australian bonds have seen a compression in yields which has been exacerbated in 2019 with the current yield on 10 year Australian Government bonds - 1.5 per cent as of 3 June -  broadly in line with the cash rate, another indication that cash rates are only going to continue to head lower," says Choudhoury.

He says investors seeking income from the investment wealth they have accumulated continue to "bear the pain of low yields across the traditional assets they would look at within their investment portfolio.

"This has meant that these investors have had to look further down the risk spectrum in the search for yield."

Those willing to take on some additional risk can look to high dividend yield equities as alternative income sources that are relatively stable, particularly if blended with corporate bonds, government bonds and cash. 

Treasurer warns banks

The decision, which was widely anticipated by market watchers, comes amid calls from Treasurer Josh Frydenberg for banks to pass on any rate cuts to consumers in full.

Frydenberg met with executives at the four big banks in recent days to urge them to pass on the benefits of a lower rate, if it happens.

Borrowers with an average home loan of $400,000 would save about $58 on their monthly repayments if the cut was fully passed on.

"I expect all banks to pass on the benefits of sustained reductions in funding costs," the Treasurer said.

Frydenberg has also reminded the banks of the recent findings of the banking royal commission, to underline his argument.

"The royal commission highlighted how the culture within financial institutions needed to improve ... and how the conduct had fallen below public expectations," he told The Australian on Tuesday.

Opposition Treasury spokesman Jim Chalmers also said banks should pass on the rate cut in order to fulfil the central banks' goal of shoring up the economy.

"I think Australians will be absolutely filthy if the banks didn't pass on the full value of any cut that we might see today. They've got no excuse for not doing that," he told ABC Radio Melbourne.

 

. Glenn Freeman is senior editor, Morningstar Australia.

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