Last week was a momentous one for the Australian economy, with the Reserve Bank of Australia cutting interest rates below 1% for the first time in history.
The move, which was widely anticipated by market participants, is a further blow to savers and those living on fixed incomes via term deposits, who have seen interest rates fall from over 7% before the Global Financial Crisis (GFC) hit a decade ago.
On a more positive note, the rate cut will no doubt provide some relief for heavily indebted mortgage holders, with research suggesting Australian household debt to income ratios are now over 190%, their highest level ever, with the vast majority of this debt housing related.
In terms of what happens next, it is almost certain that there will be more rate cuts to come. Market expectations are that the next rate cut will come in February 2020, bringing the cash rate down to just 0.50%.
This can be seen in the chart below from the ASX, which shows interest rate expectations between now and the end of 2020, though we’d note there are many that think the next cut will occur on Melbourne Cup Day, which is less than a month away.
ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve
As at market close on 8th October 2019
From our perspective it’s not so important guessing which month rates will fall next, but rather how low they will go. To that end, it seems inevitable now that they will fall all the way to zero – meaning you’ll earn literally nothing on the money you keep in the bank, with your real wealth declining once you take inflation into account.