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Certainty grows on a Melbourne Cup rate cut

Sarah Kendell
— 1 minute read

Australia is likely to see interest rates cut to zero on Melbourne Cup Day, with rates remaining around this level for the next decade as the economy recovers sluggishly from the “devastating” hit of COVID-19, a global asset manager has said.

In a virtual media briefing on Tuesday, Fidelity cross-asset specialist Anthony Doyle said share markets were pricing in a 75 per cent chance that the RBA would cut interest rates to zero at its next meeting in November.

Mr Doyle said it was possible interest rates would not move again for the next 10 years, meaning investors relying on traditional asset allocations could see themselves go backwards in terms of returns.

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“The risk for the RBA cash rate is that we don’t see a rate hike in the next decade,” he said.

“There’s a huge amount of variables such as our economic recovery and Asian economic growth following the crisis. But it’s the case today that this hit has been so devastating – unemployment has risen, there have been business insolvencies, and we’re having trouble generating any sort of inflation. 

“With that in mind, the case for rates being likely to remain at this ultra-low level has implications for investors. The old 60-40 portfolio or defensive portion is no longer going to assist you in meeting those long term investment goals, they will generate negative real returns of the foreseeable future.”

Mr Doyle said while riskier assets such as equities were likely to be “bid up” for the remainder to 2020, in the longer-term the RBA and other global central banks risked having a contractionary, rather than expansionary, effect on their respective markets.

“When interest rates get to an ultra-low level, we start to approach a point where they become more harmful than beneficial,” he said.

“There’s a point at which investors aren’t happy to take more risk so they will save more, [meaning] rather than an expansionary effect you are dragging cash out of an economy. This is what they think is going on in Europe, which has been seeing negative rates for some time. 

“We are in uncharted territory – no one knows what the after effects will be of this experiment with unconventional monetary policy such as the outright purchase of government bonds, and we may not understand what the after effects will be until some time.”

 

Certainty grows on a Melbourne Cup rate cut
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