As expected by 24 out of the 25 economists surveyed by Bloomberg in July, the Reserve Bank of Australia (RBA) carried out an August rate cut of 0.25 percent. This set another record low for the cash rate at 1.5 percent.
Going by what RBA Governor Glenn Stevens said in his accompanying monetary policy statement, the RBA cut rates this month to:
- Boost inflation: Currently at 1 percent year-on-year, Australia’s inflation is well below the RBA’s target range of 2-3 percent.
- Prevent the dollar from rising: Mr Stevens pointed out that the lower interest rates and lower dollar since 2013 has been supporting domestic demand in Australia, but warned that an appreciating exchange rate could complicate this.
As a result of these influences, and a range of other factors, the RBA board judged the prospects for economic growth would be improved with the rate cut.
Rate cut winners and losers
The obvious winners of a rate cut are mortgage holders who can expect to enjoy lower monthly repayments as a result of the decision. For example, at the standard variable average rate (on CANSTAR’s database) of 4.55 percent, someone with a $500,000 home loan could save over $70 a month at a lowered rate of 4.3 percent – provided their lender actually passes on the cut of course.
The losers tend to be people who rely on the interest earned on their savings accounts. But as with home loans, banks don’t always pass on the full rate cut to their savings account customers.
But what about superannuation?
CANSTAR Q&A with Damian Graham – CIO of StatePlus
To find out how a rate cut affects super, CANSTAR fired off some questions to Damian Graham, the Chief Investment Officer of financial planning organisation StatePlus.
Q: What short-term impact do you think the RBA rate decision in August will have on superannuation funds this financial year?
A: We know that many investors rely heavily on returns from assets in cash for their retirement incomes and so yesterday’s rate cut may have an impact on the income they receive. Obviously if they are holding a diversified portfolio of assets including shares, fixed interest, property, etc. then the cut in rates will have a more modest impact. The return generated by superannuation funds in the year ahead will be primarily driven by the returns on those other asset classes as opposed to cash so the asset allocation of the fund will be the primary driver of the return.
Q: Do you see an increase in members changing their investment options in the wake of cash rate decisions, or do most investors take a long-term view?
A: We would suggest that it is unlikely a large number of investors will allocate away from cash because of yesterday’s rate cut. It is more likely that investors will maintain their longer-term strategy and we feel that is very appropriate.
Q: How often should retirees get a financial planning check-up?
A: We recommend that clients should meet with their planner annually for a review of the progress versus their financial plan. The review supports clients in remaining in-line with a longer-term strategy that can be adjusted to reflect any changes in circumstances if required.
A mixed bag
So it seems the effect of a rate cut on our superannuation generally depends on the make-up of your fund’s investment portfolio. Super accounts with higher exposures to ‘cash’ should theoretically be negatively impacted. But this also depends on how the financial institutions respond – i.e. whether they pass on all or some of the cut to their loans and savings accounts.