For the second month straight, the RBA decided to leave interest rates on hold yesterday. The decision surprised many investors, and the market dropped sharply on the news. But while the market dipped in the afternoon, it actually ended the day higher…and it‘s up again this morning.
Whether rates are at 2% or 2.25%, it’s still not enough to entice savers into bank deposits. The poor returns on offer will continue to push investors searching for yield into stock markets. Many investors, retirees in particular, have no choice. They need to get income from somewhere.
You can also rest assured that rates will be cut again this year, at least once. After the 10% cut to the benchmark rate in February, rates are at set to stay low for a long time.
Economists are expecting two more rate cuts this year. My colleague Vern Gowdie is convinced that the RBA will drop rates to 1%. After taking inflation into account — which is sitting at around 1.7% right now — that’s a negative real return. You can read more of Vern’s thoughts on where rates and the global economy are headed — and how to protect your wealth — in his report Gowdie Family Wealth.
On the other side of the world talk has recently turned to when rates will begin to rise in the US. But for now that’s all it is…talk. And that’s certainly not the trend worldwide. It’s not just Australians facing the problem of poor returns on bank deposits.
Just this year, 21 central banks around the world cut interest rates.
In addition to Australia, the European Central Bank, Canada, Russia, Singapore, Indonesia, Switzerland, Sweden, Israel, Albania, Botswana, Poland, Uzbekistan, Turkey, Peru, Pakistan, and Egypt each cut their benchmark interest rate in 2015.
And some have made more than one cut already this year. India, China and Romania cut rates twice in 2015. Denmark has cut rates four times as it attempted to keep its krone pegged to the euro after the ECB announced its quantitative easing plans.
Interest rates haven’t been cut in the US this year, but for six years now rates have been sitting at the record low level of 0.25%. And they are looking less and less likely to rise any time soon. That’s despite what the Federal Reserve would have you believe.
Back in March 2009, the US Federal Reserve was happy to tell us that economic conditions meant rates would be held exceptionally low ‘for an extended period’. This idea of cheap money for longer excited the stock market and saw the Dow Jones begin its rally to where it is today.
By August 2011, the Fed had replaced the phrase ‘for an extended period’, with what seemed to be a more specific target — ‘at least through mid-2013’. The market fell sharply but soon resumed its rise to new record highs.
This target date was then bumped back again and again. The Fed now suggests a rate rise could come in mid-2015.
It’s not quite mid-2015 yet, but no rate rise came from the Fed’s April meeting. A number of Fed officials say they were worried about the effects of the strong US dollar, which can weigh on company earnings, and whether inflation can get back to its 2% target (it’s at zero now).
Some officials are also concerned about the employment outlook. They’re worried that unemployment won’t be low enough to support rising prices and economic growth.
That said, Yellen mentioned that a rate hike in June hasn’t been ruled out. But I don’t believe it. It’s just more of the same — the fed trying to convince us that higher rates are just around the corner.
And it’s not what the market expects. The futures market is telling us that less than half of all traders expect a rate hike by December. I would place more weight on their opinion than on what the Fed is saying. They’ve got money on the line, and Fed has shown it’s happy to push back its target date time and again.
But if you think six years of record low interest rates is a long time, you should check out Japan.
Japan’s benchmark interest rate has been at or around zero going on 20 years. Not only is their interest rate at zero, Japan’s inflation rate is 2.2%. For savers that’s not good news. By keeping money in the bank, Japanese spending power is going backwards.
Record low interest rates could be with us for much longer still — both in Australia and abroad. That’s not what savers want to hear. The good news is that stock markets are making new highs after new highs.
But to take advantage of those gains, you must be invested. I have recommended in the Australian Investors Club some of the best global companies that you should own today. And it doesn’t have to be as risky as you might assume. You can check it out here.
Investment Director, Australian Investors Club