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Threat of further rate cuts should prompt savers to make moves

July 10, 2019

July 10, 2019

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Threat of further rate cuts should prompt savers to make moves

As the Australian economy either lurches into a serious downturn or falls deeper into one, depending on your perspective, the Reserve Bank has cut rates in an attempt to stimulate flagging growth numbers. Interest rates have now been slashed to just 1 per cent, a record low and, it’s the second consecutive month that the RBA has been forced to take action.

As the Australian economy either lurches into a serious downturn or falls deeper into one, depending on your perspective, the Reserve Bank has cut rates in an attempt to stimulate flagging growth numbers. Interest rates have now been slashed to just 1 per cent, a record low and, it’s the second consecutive month that the RBA has been forced to take action.

This is in response to the latest annual GDP growth figures which show that the economy growing at just 0.4%, and only 1.8% annually, a far cry from where it needs to be in order to be confident of heading off a recession. Unemployment rates in April increased to 5.2%, well above RBA Governor Philip Lowe’s stated ambition of 4.5% unemployment. Furthermore, financial markets have already priced in a further expected rate cut before November this year, even going so far as to price in a 20% chance of a third consecutive cut just next month.

Writing in The Guardian this week, Stephen Koukoulous, a former Chief Adviser on Financial Markets for the Department of Treasury and Chief Economist at Citibank, commented that:

“These economic circumstances were broadly in place about a year ago, when the RBA should have cut interest rates to current levels, a move which would have supported activity in 2019”

He further opined that the RBA was now “playing catch up”, and further observed Mr. Lowe’s inaction has meant that the success of the rate cut will now largely hinge on factors outside the RBA’s control. Influences include the proposed reforms to tax policy, which the opposition are encouraging the government to push through ahead of schedule, other stimulus programs from the Morrison government, the continued strength of commodity prices, as well as house prices and construction levels.

In the wake of the announcement of the rate cut, business confidence briefly rebounded, according to NAB’s latest business survey. However this rebound was short-lived, and confidence levels fell below those of June and May once more.

Doubly painful is what the rate cut means for the 3 million Australians who are reliant on the interest generated by their savings accounts, including a third of those who are deemed to be “very reliant” by Digital Finance Analytics. As rates drop, naturally individuals who are not operating with much headroom on their income generated through interest may be forced to begin withdrawing their initial capital, an extremely unappealing prospect with potentially damaging long term consequences. With further cuts on the horizon, savers finding themselves in this position will be looking for alternatives to stem the bleeding.

An alternative, which some might turn to, is bonds. Reach Markets is presently offering the opportunity to gain access to a high yield bond fund, which could be a solution to those looking to hedge themselves against the slide in rates. If you’re interested in finding out more about this 708 wholesale investment, please click here.

 

*Reach Markets are the advisors assisting on with the management of this offer and may receive fees depending on whether an offer is taken up by investors.


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