What the latest rate cut means to you

The Reserve Bank of Australia (RBA) cut interest rates to an all-time low of 0.25 per cent on Thursday, in the first emergency rate cut outside its usual monthly meeting since 1997.

The central bank also announced it will start quantitative easing (QE) for the first time in history.

Treasurer Josh Frydenberg believes the banks will pass on the rate cut in full.

RBA governor Dr Philip Lowe said that along with the cuts the bank will buy government bonds to help support jobs and incomes and the country recover strongly when the crisis eases.

The purchase of government bonds will also drive down borrowing costs for business and government.

Dr Lowe added that the bank won’t increase interest rates until the nation was close to an unemployment rate of 4.5 per cent and inflation hits around 2-3 per cent a year.

The bank will also set up a program to allow banks to supply $90 billion worth of cheap credit to small and medium-sized businesses.

“The Reserve Bank will provide a three-year funding facility to authorised deposit-taking institutions (ADIs) at a fixed rate of 0.25 per cent,” Dr Lowe said.

“ADIs will be able to obtain initial funding of up to three per cent of their existing outstanding credit.

“They will have access to additional funding if they increase lending to business, especially to small and medium-sized businesses.”

The RBA’s announcement aligns with global central banks’ stimulus packages set up to help stabilise financial markets and limit the economic impacts of the coronavirus.

The world may already be in recession, according to ratings agency S&P Global. ANZ believes Australia’s unemployment rate will reach 7.8 per cent by the end of the year. And economists predict at least two quarters of “well below-trend growth” which will lead to higher unemployment and slow recovery.

“Growth through 2020 is now estimated at 1.5 per cent with minus 1 per cent in the first half and 2.5 per cent in the second half,” said Westpac chief economist Bill Evans.

“The unemployment rate is now forecast to reach seven per cent by October 2020 (up from the previous estimate of 5.8 per cent-6.0 per cent) due to the larger negative shocks to the labour-intensive sectors such as recreation; tourism; education; renovations and additions; and dwelling construction.

“This lift in the unemployment rate is despite reducing the participation rate from 66.1 per cent to 65.4 per cent as a discouraged worker effect – that is, as workers respond to a deteriorating labour market, the participation rate is likely to decline.”

And while whispers of a recession or even possible depression are on the wind, some financial pundits are taking a more positive outlook.

State Street Global Advisors is one of them. It believes talk of a global recession may be premature. 

“Undue panic and fear is the worst recipe in times like this,” said head of global macro policy research at State Street Amlan Roy. 

YourLifeChoices asked ‘three wise money men’ for their thoughts on how the latest rate cut will affect retirement, what the COVID-19 pandemic will mean for your savings and whether there might be anything you can do to alleviate the hit to your retirement income and nest egg.

Noel Whittaker – finance and investment expert
“Balance is necessary. Coordinated central bank actions have not been considered effective by the market … Street talk of ‘global recession’ is confused when based on stock market losses and volatility.

“The only benefit to retirees, is that it will make franked dividends from shares even more attractive but given the recent slumps in the market I think that might take months to work its way through. In my view the possibility of a depression is not impossible – as more and more people lose their jobs; the multiplier effect will be massive.

“Some state governments are offering a “payroll tax holiday” which simply means the boss won’t need to pay it right now – it’ll just accrue to be a debt payable in the future. It’s the same with the government interest-free loans. At the end of the day the small business will still be left with a debt – and let’s face it there’s not a lot of difference between a zero interest loan and one at three per cent.

“In some countries they are now offering mortgage holidays – as far as I can find out this simply means you don’t need to make payments – but the interest will still be building up.

“We are living in unprecedented and dangerous times – retirees should take every opportunity to preserve their assets. Hopefully they have taken the advice I have been giving for years and have at least two or three years expenditure in cash.”

Russell Markham – VectorVest financial analyst
“A rate cut will certainly help those on variable mortgages.  Lower interest rates are designed to stimulate economic growth. We need to do what we can to inject confidence back into the economy with all that is taking place.

“Retirees with savings accounts will earn less interest. It really hurts those saving.

“Cash is king at present. However, retirees and those with savings accounts will earn less interest as a result of the rate cut. It really hurts those saving. It is a double-edged sword at the moment.

“Interest rates really cannot get much lower, now at 0.25 per cent. One would think that the only way is up now. However, the longer COVID-19 remains, the longer low interest rates are likely to prevail. 

“I am getting my shopping list ready to purchase top quality blue chip stocks that have been heavily beaten down in price where the earnings have not changed too much.  However, timing will be of utmost importance. For those who time the market correctly, it could prove very beneficial. The key is knowing what to buy and what to buy.”

Kirby Rappell – SuperRatings executive director
“We have seen rates reach a new record low now sitting at 0.25 per cent, which was not a surprising move given the current market conditions.

“Whilst the goal is to help the economy, it presents challenges for retirees who tend to be invested in more conservative options which have a higher exposure to fixed interest and cash and the return on these investments will be more muted.

“Main tips right now are to avoid making any rash decisions and to be very careful if considering switching investment options or moving into cash as you will be locking in the losses we have seen across markets.

“We have seen superannuation account balances impacted by the COVID-19 pandemic and the economic impacts will take time to flow through; however, super funds have proved relatively resilient and we continue to emphasise that these are losses on paper only and super funds’ strategies are set with the long term in mind.

“Seeking advice from your superannuation fund or a financial adviser you trust to understand how the changes affect your personal situation is key.”

How do you see your retirement being affected by the coronavirus pandemic?

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Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.


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