interest rate cuts retirees

More interest rate cuts are coming. That’s virtually guaranteed after Thursday’s speech by Reserve Bank governor Philip Lowe, that has economists tipping the RBA will go two-for-two and cut rates again at its July meeting. In a speech on “The Labour Market and Spare Capacity”, Lowe told his audience that it would be:

… unrealistic to expect that lowering interest rates by one quarter of a percentage point will materially shift the path we look to be on. The most recent data — including the GDP and labour market data — do not suggest we are making any inroads into the economy’s spare capacity. Given this, the possibility of lower interest rates remains on the table. It is not unrealistic to expect a further reduction in the cash rate as the board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target.

He also urged the government to provide more fiscal stimulus, “including through spending on infrastructure”.

Just take a step back for a minute and reflect on what Lowe is saying: interest rates have been at record lows for years; the federal government has been pumping money into the economy for more than a decade; and the central bank thinks further rate cuts and more fiscal stimulus are still needed.

But there’s one group that disagrees with Lowe, vehemently. With more interest rates will come more complaints from one of Australia’s most lavishly protected groups. In the wake of an election in which the self-interest of wealthy retirees won out over sensible tax policy, retirees are evidently feeling empowered to demand that the economic interests of the rest of Australia be further put aside to serve them. Or, at least, if you read the Financial Review, you’d be left with that impression.

Ever since the Reserve Bank began flagging that interest rates might come down, the AFR has told us over and over and over and over and over again how terrible low interest rates are for retirees. Indeed, this has been a staple of the AFR‘s interest rate coverage over the years — who can forget the AFR‘s dire warning in 2016 that a rate cut would mean retirees would have to slum it in Bali rather go to Europe for a holiday?

Some of the quotes in the latest coverage have been hilarious — although not quite as ridiculous as 7.30 taking seriously a retiree whining about franking credits from the back of his yacht during the election campaign. Martin North — he of the doom’n’gloom property shtick — claimed low interest rates were “creating an existential crisis” and that “savers have been hit over the head with a four-by-two”. A retiree fretted “falling interest rates will force him to cut back on luxuries”. Others complained they’d been forced to go and see financial advisers (actually, that’s fair enough, on reflection).

Liberal MP Tim Wilson, who ran a successful scare campaign against Labor’s efforts to end the franking credits scam, went further and attacked the whole idea of interest rate cuts, warning “with so much of the population depending on interest-bearing deposits for their income, it can actually reduce disposable income for those who can afford it least”. Wilson presumably supports jacking up interest rates as high as possible in order to increase disposable income, given “so much of the population” depends on deposits.

The logical thing for retirees to do, of course, is to abandon term deposits altogether and pile into shares, given the extraordinary tax advantages of franking credits for retirees that Wilson and his mates have widely advertised. No one’s going to take it away from them, ever. But it seems somehow appropriate that retirees and their cheerleaders don’t merely want to preserve the franking credit scam but demand that interest rates be kept up as well.

Fortunately, unlike the government, the Reserve Bank remains focused on the national interest, rather than serving vested interests like wealthy retirees who already benefit from a generous tax system.

Peter Fray

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