The address was predominantly focused on equity and property markets moving ahead and investor optimism driven by continued stimulus measures and vaccine distribution.

Dr. Lowe stated that “very significant monetary support will need to be maintained for some time to come.  It is going to be some years before the goals for inflation and unemployment are achieved.  So, it is premature to be considering withdrawal of the monetary stimulus.” 

He went on to state that the “cash rate will be maintained at 10 basis points for as long as is necessary.”   Before increasing the cash rate, the Board wants to see inflation sustainably within the 2 to 3 per cent target range.” 

This means interest rates will remain lower for longer.  For investors and self-funded retirees, this would not necessarily be welcome news.  Low-risk interest-bearing investments such as bonds and term deposits are likely to generate returns below the rate of inflation for years.  If you are in this boat, your assets are losing their purchasing power over time. 

The Governor also observed that while the pandemic has had significant economic costs, the downturn was not as bad as had been feared and the recovery has been stronger and started earlier than expected.  This had been evidenced by strong employment growth, retail sales and new house construction. 

What could explain this? 

Australia’s success in containing the virus has enabled fewer restrictions on activity and allowed many of us to return to work sooner. 

The significant fiscal policy support (almost 15% of GDP) delivered by Federal and State Governments has also played a role in stimulating activity, providing a boost for incomes and jobs. 

Australians have also adapted and innovated to keep their businesses operating and this resilience has also kept the economy going.  Some businesses changed their models, others moved online and used new technologies.  Households changed their spending patterns, with money that is usually spent on holidays and travel being spent upgrading homes, appliances, and renovations. 

Another factor has been the large number of ex-pats who have returned home.  About 400,000 Australians have returned from living overseas.  This inflow has, to an extent, offset some of the expenditure of overseas tourists. 

However, it is not all good news. 

Unemployment remains higher than it was almost 20 years ago, and under-employment remains an issue for many who cannot get the hours of work they seek.  

Given the spare capacity in labour markets, wage growth is expected to remain low and this will see the current low inflation rate (1.25%) remain below the RBA’s target range for some time. 

The RBA expects the Australian economy to continue its recovery with GDP growth above trend for the next couple of years.  However, this growth will likely be held back due to lower population growth.   

A year ago, forecasts expected our population to grow by 1.6% per annum for 2020 and 2021, but now the actual outcome will look more like 0.2% in 2021.  This is the lowest growth since World War 1.  Slower population growth means we will not see GDP growth back to the previous trend until immigration recommences. 

Unemployment is expected to continue to decline.  The RBA expects the unemployment rate to fall to 6% by the end of this year and get to around 5.25% by mid-2023. 

With this outlook, the RBA expects wages growth and inflation to remain subdued. 

Investors should not be ‘spooked’ by inflation headlines over the next six months.  The RBA noted that inflation is expected to spike to around 3% in the June quarter, reflecting swings in the prices of childcare and other administered prices, but then return to below 2% by the end of 2021. 

Household income is expected to decline as the pandemic support payments cease at the end of next month.  However, this may not result in a drop in spending as many have been saving over the past 12 months.  The easing of restrictions will also give consumers the freedom to spend and more confidence as uncertainty recedes. 

The housing market also has an impact on spending levels – a positive housing market, such as we have seen recently, supports household balance sheets and encourages spending.  Lower mortgage rates also contribute in a positive manner. 

What does this mean for investors? 

Economic conditions will ebb and flow throughout an investor’s lifetime.  Trying to predict which investment sector to own based on economic conditions can be extremely difficult to time well, and often ends up costing investors. 

Diversifying exposures across asset markets will assist investors to limit the impact of lower interest rates on their portfolio incomes.  

Corporate Australia has seen a significant rebound in financial health over the six months to December, and the outlook for dividends is positive. 

Quality property with sound tenants and long leases will also provide cash flow support to investment portfolios. 

Investors should set their asset allocation, or spread of assets, to meet their goals and objectives.  This could be cash flow oriented, or it could be growth oriented.  In the end, that asset allocation should drive investment decisions with regular rebalancing ensuring your portfolio remains on track to achieve your goals. 

If you are concerned about how low interest rates are impacting your investments or income, now would be the time to speak to one of our highly qualified Private Client Advisers.