27 February 2017

Over the past week Australian shares were 0.7% lower. Shares in developed countries were up 0.2% with the US market 0.7% higher. Shares in emerging markets gained 0.5%. The Australian dollar was 0.2% higher at 76.76 US cents. The 10 year bond yield in Australia was 0.07% lower at 2.73% while in the US, the 10 year bond yield closed 0.10% lower at 2.31%. The oil price gained 1.1% to 53.99 US dollars per barrel.

The chart below tracks a measure of the ‘real return’ over time. This measure is the Reserve Bank of Australia’s (RBA) official cash rate minus the inflation rate. Real returns are important as your portfolio needs to earn at least the inflation rate just to maintain its purchasing power.

GraphThe chart is a rough guide to the real return you get from investing in cash; ‘rough’ because we’re looking at past inflation rather than future or expected inflation.

There are some interesting points to make:

  • Real interest rates are currently at very low levels (close to zero). This means if you were to invest in cash there is a risk that the purchasing power of your portfolio might actually go backwards.
  • Real cash rates have been trending down for a long time. The negative rate in late 2000 was related to the introduction of the GST which resulted in a one off positive boost to inflation.
  • Real interest rates are an indicator of whether ‘monetary policy‘, the setting of interest rates, is trying to stimulate or slow down economic growth. Low real interest rates suggest that the RBA is definitely focused on stimulating economic growth.
  • Real interest rates are at very low levels in most developed countries. Because of this, if economies weaken from here it will be quite difficult for central banks to do much more to stimulate economic growth.

Signing off

David Bell

Past performance isn't necessarily an indicator of future performance.
All data sourced from Bloomberg and the Reserve Bank of Australia.