Retirees relying on interest income are set for another year of pain with rates tipped to stay at 0.1 per cent for at least the next 12 months.
Many self-funded retirees in Australia rely on income from interest, with those aged 55 and over receiving two-thirds of all interest income in Australia and households where the head of the household was aged 65 or over earning more than 20 per cent of their income directly from interest.
Despite the economy recovering significantly this year, these self-funded retirees are unlikely to see their income returned to normal levels any time soon, according to predictions from the Australian National University’s RBA Shadow Board.
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The RBA’s shadow board brings together nine of the country’s leading experts to look at the economy and make predictions on the optimal setting of interest rates ahead of the monthly RBA board meetings.
It’s latest predictions ahead of Tuesday’s cash rate announcement suggest that the rate should stay at 0.1 per cent for at least one more year. The cash rate was cut to the historically low figure in November last year and hasn’t budged since.
In its latest vote, the shadow board attaches a 95 per cent probability that an interest rate of 0.1 per cent is the right setting for Tuesday’s announcement, while the board also has a 62 per cent conviction that 0.1 per cent interest rates will still be the right setting in 12 months.
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As for when interest rates should eventually start to rise again, the shadow board has an 89 per cent conviction that rates should rise above 0.1 per cent in three years.
Shadow RBA chair Dr Timo Henckel said the board’s conviction to keep interest rates at 0.1 per cent had eased slightly (down from 98 per cent in May) but remains very strong at 95 per cent for Tuesday’s announcement.
“The lockdown in Victoria serves as a potent reminder that COVID-19 can affect the domestic economy unexpectedly at any time, at least until a large proportion of the Australian population is vaccinated,” Dr Henckel said.
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Dr Henckel admitted that there were good signs that the economy had been recovering but policies suggested interest rates would need to remain low for some time yet.
“The recent economic recovery has been gathering pace, leading to favourable outcomes in the labour market in particular,” Dr Henckel said.
“The new Federal Budget reflects the overall strength of the Australian economy, pouring an additional $104 billion into treasury’s coffers between now and 2024-25, relative to the official forecasts released six months ago.
“This means that, after taking all new spending into account, the underlying deficit is projected to equal $161 billion in 2020-21, $37 billion less than assumed in last December’s Mid-Year Economic and Fiscal Outlook.
“However, further fiscal and monetary stimulus is needed for the foreseeable future and so large budget deficits and low interest rates are likely to persist for years.”
While the RBA has been firm on its commitment to keep the cash rate at 0.1 per cent until at least 2024, there have been global rumblings of interest rates being lifted with both the Bank of England and the Reserve Bank of New Zealand discussing lifting their interest rates much earlier.
After the Federal Budget was announced, the chief economist at global investment bank UBS, George Tharenou, told Nine News that the greater-than-expected budget position could force the RBA to lift interest rates earlier than expected.
“We still expect the RBA to hold the cash rate until end-22, but we now see the risk of an earlier rate hike than the RBA’s forward guidance of 2024,” Mr Tharenou wrote in a research note.
Have you changed your income strategy given bank interest rates have bottomed out? Have you tried your hand at index funds or on the stock market? What advice do you have for others?
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