Momentum Interest Rate commentary
Reserve Bank Monetary Policy Committee leaves interest rates unchanged
The Reserve Bank’s Monetary Policy Committee (MPC) yesterday (Thursday 13 May 2010) announced that it is maintaining the repurchase rate (repo rate) at 6.5 per cent. The prime rate therefore remains at 10 per cent. The Governor mentioned that the committee’s decision to keep interest rates unchanged was unanimous. Although the decision was fairly widely expected by economists after the previous surprise rate cut, there were at least some economists that felt that the current economic conditions still left room for another rate cut. Momentum had expressed this opinion as well.
The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas declined to 5.1 per cent in March 2010 from 5.7 per cent in the previous month. The Reserve Bank expects inflation to remain within the target range of 3 – 6 per cent until 2012, averaging 5.3 per cent until the end of that year. While the Governor did not appear overly concerned about the inflation outlook, mentioning that risks to the outlook are now more evenly balanced and that global inflation, food prices and consumer demand do not present immediate risks to domestic inflation, she emphasised that administered prices and wage increases have the potential to pose inflation risks.
The governor highlighted a number of positives for the domestic growth outlook and commented that the recovery in domestic growth appears to be sustained, however she r observed that employment trends appear to be lagging the domestic recovery, referencing the 171,000 jobs that were lost in the first quarter of 2010.
It is encouraging that the MPC maintained a position on the currency that is consistent with the message that was communicated by the Minister of Finance in the national budget earlier this year. The MPC responded to calls for more significant intervention to influence the value of the currency by commenting that the recent experience in Greece highlighted some of the challenges of fixing an exchange rate. The MPC also pointed out that previous attempts to manipulate the currency did not have a significant impact. Investment market participants would have been encouraged by the consistency in this message.
Many conservative investors and retirees investing in fixed income assets for retirement income are feeling the pinch of current low interest rates. As an example, a 30 per cent tax payer is currently likely to earn an after tax return of less than 5 per cent on a money market fund investment. While low interest rates afford private households the opportunity to repair their balance sheets, the impact on interest income dependent savers cannot be ignored. The financial services industry is responding to this challenge with innovative product designs to enhance yields to investors. However, many investors are unfortunately tempted into investing in more speculative or less well regulated investment avenues like property syndications and investments with opaque tax treatments that are not necessarily appropriate to their circumstances. We would caution investors to maintain high levels of vigilance and due diligence when investigating and considering investment alternatives.
