Reserve Bank’s message for Frydenberg
Philip Lowe’s announcement about interest rates was not only bad news for savers, but unintentionally sent a strong message to federal treasurer Josh Frydenberg, writes Terry McCrann.
Terry McCrann
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The big thing Reserve Bank governor Philip Lowe announced on Thursday was bad and challenging news for savers. It also – quite unintentionally – sent a big message to treasurer Josh Frydenberg.
Lowe told savers they could forget about getting any interest on their savings in bank deposits, pretty much for some years and indeed well into the foreseeable – and, UN-foreseeable – future.
In effect he was telling them they could opt for safety – a bank deposit; but they would get no return; in three or five or maybe even ten years they’d just get their money back.
Or they could chase a return by investing in property, the share market or whatever. They might make five or ten per cent a year on their money; but they could also lose some or much or indeed all of it.
That’s the basic reality of risk and return – the higher the risk the higher the return. We’ve always had it. But never before has an RBA governor committed to deliver absolutely zero return if you want zero risk, and deliver it well into the future.
The message he therefore sent – to stress again, unintentionally – to Frydenberg, is that he has to not just once again cut the deeming rate for pensioners, to better align with zero bank interest rates, but that he has to fundamentally reform the whole structure of the deeming rate.
In March Frydenberg did get – half – realistic about deeming rates.
He slashed them to just 0.25 per cent for investments up to $53,000 for singles ($88,000 for couples) and 2.25 per cent for amounts over that.
The 0.25 per cent aligned with the RBA’s then record low official interest rate of 0.25 per cent. If Lowe follows through by cutting it to 0.10 per cent on Cup Day – as he all-but announced Thursday – Frydenberg should at least do the same with the deeming rate.
Now I need to explain about the deeming rate as it is largely – and not unreasonably – misunderstood by especially pensioners. They think it reflects what you can get on bank deposits and ONLY bank deposits.
So they think it absurd for the government to assume that if you have $100,000 in a bank deposit that you are earning 2.25 per cent on it.
On what planet exactly can I get that, Mr Frydenberg, a pensioner might reasonably and politely enquire?
In fact the deeming rate tries to estimate what you could get on a BLEND of investments – not just bank deposits, but shares, managed investments and loans you might have made.
This is where treasurers and their ivory tower treasury advisors have been offensively unrealistic. The idea that a pensioner with $100k of savings could or – even more offensively, should – try to chase higher returns by investing in the share market is ludicrous.
It is exactly appropriate for he or she to put the $100k into a bank deposit. Indeed, governments ACTUALLY encourage them to do that with the government guarantee.
To then say the government is going to assume they earned 2.25 per cent in interest when they only earned, they only COULD earn, say 0.2 per cent – and cut their pension accordingly is offensive.
Indeed, even if as a pensioner you have $2m to invest, why shouldn’t you be able to choose to opt for security by putting it into bank deposits? What on earth is it the business of government to tell you that you MUST invest in risk investments or lose some of your pension?
Yes, by all means protect against a relatively wealthy pensioner lending their, say, $2m of savings to their children interest free. Is that so difficult to structure; instead of the crude blunderbuss of a catch-all deeming rate?
So the deeming system was out-of-date and offensively punitive before Thursday. But Lowe took it to a whole new level by not only committing to near permanent near-zero bank interest rates, but unleashing even more increased volatility for risk assets.
When central banks and governments combine to destabilise the investment universe, it is even more appropriate for pensioners to be able to put their pitiful savings in safe and accessible bank deposits.
No, I’m not arguing they should be given a special interest rate. I am saying they should not be offensively and unfairly penalised by government.
Lowe didn’t all-but announce the official rate cut to 0.15 per cent AND it would stay there for years; until AFTER inflation had risen above 2 per cent.
He would also directly fund the banks at that 0.1 per cent, reducing the pressure on them to compete for deposits from savers.
The deeming structure was out of date before Lowe spoke. He not only sent an unpleasant message to pensioners; it was a message that demanded a treasurer and a bureaucracy wake up.
Originally published as Reserve Bank’s message for Frydenberg