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Will the RBA cut the cash rate?

Will the RBA cut the cash rate?

Asset managers say low interest rates and an uncertain global macroeconomic environment will continue to create a challenge for investors.

Should investors be lowering their return expectations in the face of an uncertain global macroenomic environment, or should they be considering other investment strategies to make the most of low interest rates and low inflation?

The Consumer Price Index (CPI) – the main measure of inflation in Australia – rose by 0.4% in the June quarter, in line with expectations, and in seasonally adjusted terms the CPI rose by 0.6%.

Overall, inflation is now at a 17-year low, with the annual rate of inflation falling from 1.3% to 1.0% – equalling the low set in June 1999.

Inflation is one of the factors that the Reserve Bank of Australia (RBA) looks at to determine monetary policy, in particular the cash rate, which is the basis for setting bank lending rates.

The cash rate is already at a record low 1.75%, and the next RBA Board meeting is on Tuesday, August 2.

CommBank analysts are forecasting cuts in August and again in November, which would take the cash rate to a new historic low of 1.25%.

Chief investment officer at Altius Asset Management, Bill Bovingdon, said the inflation data gives the RBA the “green light to cut the cash rate one more time” this year, “so bonds can make a little more in gains”.

“It’s certainly fully priced into the market and if they deliver, the question is then whether there will be another cut in the cash rate this year.”

When interest rates decline, bond prices can rise because more people will want to buy bonds that are already on the market as the coupon rate, or yield, will be higher than on similar bonds about to be issued, as they will be influenced by the current cash rate.

Winners from monetary policy

Bovingdon argues that while recent trends in monetary policy have been good for some, it hasn’t worked for a large part of the population. 

Some of the signs are good – for instance, unemployment has been this low only four times before in the past 50 years – but he thinks there are headwinds that are preventing a positive impact being felt.

“Monetary policy needs to create an environment where wages are growing and consumers have the capacity to spend,” Bovingdon said. 

“The Reserve Bank of Australia has now significantly lowered inflation forecasts and subsequently cash rates in the hope of boosting private business investment and supporting economic growth, but this continues to drive investors to search for yield outside the traditional income options.” 

Low rates, limited earnings growth

Other asset managers including Prasad Patkar, head of qualitative investment at Platypus Asset Management, think the low growth environment will persist for some time and investors should be prepared for low interest rates and limited earnings growth for the medium term.

Chad Padowitz, chief investment officer at Wingate Asset Management, argues stock selection will be key for investors.

“There are significant outflows in equities, yet the market is at an all-time high. It seems that expensive sectors are being funded by selling cheap sectors,” he said.

Property 'still attractive'

Mark Pratt, general manager at Australian Unity Real Estate Investment, said a high level of offshore investment in Australian property was still evident, including in the industrial, retail and commercial sectors. 

“As one of the few countries with positive interest rates, we expect this ‘flight to safety’ trend to continue, even with the forecast that the RBA will cut rates further this year," he said.

“Both yield and distribution returns for property have remained strong for the last decade, and the healthcare property sector in particular has seen significant uplifts in capital growth. 

“We believe that there is still room for cap rates to compress and as such, property will remain an attractive asset class for investors.”

This article has been prepared by the Commonwealth Bank of Australia (CBA) ABN 48 123 123 124 AFSL and Australian credit licence 234945. It has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only. The contributors to the article, including representatives of Altius Asset Management, Platypus Asset Management, Wingate Asset Management and Australian Unity Real Estate Investment are external entities that are not members of the Commonwealth Bank of Australia Group of Companies (the Group) and the content does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. CBA, nor members of the Group accept any liability for losses or damage arising from any reliance on external parties their products, services and material.