Savers and older Australians lose out as RBA cuts cash rate again

The latest rate cut is going to hang savers and older Australians out to dry.

It might be oxygen for the sharemarket, but the latest rate cut is going to hang savers and older Australians out to dry.

Cash deposit rates will now struggle to keep pace with inflation, instantly pushing investors into riskier investments.

Ironically, conservative investors who might have avoided the worst of the recent sharemarket drop by moving into cash will be among the first hit.

The move will also play straight into the hands of “high interest” fund promoters where serious questions are already being raised on the suitability of many such funds for “mum and dad” investors.

As Peter Gardner, a portfolio manager at Plato Investments, an income-focused managed fund, suggests: “It will make life yet more difficult for retirees struggling to live off the income from their cash linked investments. Real yields on cash, bonds and term deposits are already negative and this cut can only make life more difficult.”

Meanwhile, sharemarket investors drew a sigh of relief on Tuesday after an earlier 5 per cent lift on Wall Street finally unleashed some serious bargain hunting.

The ASX responded to Wall Street’s technical snapback with some early enthusiasm - which should have been further buoyed by the interest rate cut - however by the end of the day the S&P/ASX 200 could only muster a modest increase of 0.7 per cent to 6435.7 - a sign that most investors are not convinced the coronavirus crisis on the sharemarket is anywhere near over.

In terms of specific stock action on Tuesday, traders were beginning to bet the major banks have reached a point where dramatically lower rates will now be an operational problem even if their stocks offer strong dividend yields.

All of the major banks actually lost ground over the day, while traders pushed up medical stocks such as CSL, Ramsay and Cochlear along with defensives such as Telstra and Coles and leading property trusts.

CSL’s lift of 2.2 per cent to $313 means the blood products group is now the biggest stock in Australia in terms of ASX market capitalisation.

“This is the shape of the market now - it’s volatile and it’s actually been like this for more than a year ... investors have opportunities in this atmosphere, but they have to accept the volatility,” said Will Hamilton of Hamilton Wealth Partners.

As investors are left to make the best of a sharemarket that presents as an accelerating roller-coaster, the cut in rates should at least put some extra spending money into the economy.

With mortgage rates (owner occupier - principal and interest) now hovering just over 4 per cent, the savings on a $400,000 home mortgage could be around $720 a year, however this assumes that the mortgage holder will choose to cut their repayments and spend on other items, which is not always the case.

Though the major banks quickly announced they would cut mortgage rates broadly in tandem with the 0.25 per cent lead from the RBA, bank plans to lower cash deposit rates are not expected to be fully detailed for some days and with considerably less fanfare.

The RBA cut to 0.5 per cent - along with anticipated cuts from other central banks around the world - should help sustain a recent recovery in residential property prices and extend a period of reasonable total returns from bond markets and bond-based Exchange Traded Funds.

However, leading advisers warn that Australian retail investors new to “high interest funds” linked with private equity and corporate credit bond funds are often taking exceptional risks to achieve current returns.

Wall Street futures were mixed all through Tuesday’s ASX session - an indicator that suggested there was only a slim chance Wall Street would manage two good days in a row.