The return of cash returns?

It’s been three years since COVID19 caused the world to be turned upside down in so many respects, and still, some lingering residual effects are evident on the average Australian’s way of life.

It’s great to feel that the worst of the lockdowns, mask mandates and isolations seem to be behind us. Not only that, but the introduction of working from home or remotely has seen a significant lift in lifestyle and free time for those lucky enough to be in occupations where it works well.

On a financial front, we are now moving from pandemic levels of stimulus and record low-interest rates to a new normal as the economy pulls itself together. The widely held view (supported by the Reserve Bank of Australia) is that ‘rates are on the rise’ to help arrest uncomfortable inflation levels. But the question remains, how high can rates (and, in turn, returns on cash deposits) go in the current environment?

The simple answer is probably not much. The RBA has indicated they are comfortable with both unemployment (under 4%) and that headline inflation is convalescing in their target range (2-3%). On the latter, the issue at hand is deciding how much emphasis needs to be attributed to the recent spike in oil prices (tempered somewhat now by the temporary reduction in taxation), which runs the risk of abating in the short term.

The stumbling block for a ‘full astern’ call from the national bridge now appears to be wages growth, which has proven sluggish before and after the pandemic.

It is no secret that one of the favoured tools of the Reserve Bank of Australia is ‘talking about’ action, which is also known as ‘jaw boning’. The difference here is that after over a decade of stern words (but little action) about overheating property markets in the face of falling inflation and wages. The messaging is rising in intensity as more of the dominos required for action are falling.

So the prospect of a substantial rate rise is now almost a certainty. The quantum of the increase is now the question and how much our central bank can stomach the risk of an overreach, also known as a ‘policy error’.

Inaction can lead to an overheating economy beset by painful inflation at the checkout. Still, overaction forces the hand of weaker businesses to cut costs and staff, which runs the risk of destabilising property prices as stretched borrowers are forced to liquidate into a lower demand market.

Many economic factors can be blamed for rising inflation, asset prices, and a tighter labour market. Nevertheless, recessions without an external shock are often attributed to poor monetary planning and policy. Not the kind of thing that any central bank governor wants to see in their term of office.

The message is clear that the RBA is willing to wait and that the cash rate will remain well below historical averages for the foreseeable future. The bond market disagrees, pricing in ten (10!) rate hikes in the next 18 months. Clearly, it is not their legacy on the line here.

So, what does this mean for the savings of Australian Strata? Unfortunately, the continuance of below-inflation returns eroding the purchasing power and means unavoidable rises to strata levies and long-term fund contributions.

Thankfully relief is at hand. Strata Guardian is here to help your plan or scheme to target inflation-beating returns over extended savings periods, where inflation can make the most significant impact. We would love to discuss how we might help the fight against a common enemy.

Tim Fuller is the Head of Wealth at Strata Guardian and an authorised representative of Strata Advice AFSL 528306.