Market Watch

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, but some key commodity prices are much lower than a year ago. This trend appears largely to reflect increased supply, including from Australia. Australia’s terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are continuing to ease policy. Hence, global financial conditions remain very accommodative. Despite some increases in bond yields recently, long-term borrowing rates for sovereigns and creditworthy private borrowers remain remarkably low.

In Australia, the available information suggests the economy has continued to grow, but at a rate somewhat below its longer-term average. Household spending has improved, including a large rise in dwelling construction, and exports are rising. But a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year. Public spending is also scheduled to be subdued. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. With very slow growth in labour costs, inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with stronger lending to businesses and growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

Having eased monetary policy last month, the Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Information on economic and financial conditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.

Enquiries:

Media Office
Information Department
Reserve Bank of Australia
SYDNEY
Phone: +61 2 9551 9720
Fax: +61 2 9551 8033
E-mail: rbainfo@rba.gov.au

From AMP Capital

Retirees concerned about the latest cut to the official cash rate need to clearly identify their investment goals to help clarify whether capital stability or income sustainability is of greater importance. 

Sustainable income in a low- rate environment

Cash investments such as term deposits have been regarded as a safe option for cautious investors due to the stability of their capital value and, at least historically, the delivery of an adequate level of income.

However, official cash rates are now at historically low levels and the income from term deposits has fallen to levels marginally above the underlying rate of inflation. By contrast, a diversified portfolio of bonds, shares and real assets can be managed to meet the goal of a predictable and sustainable income stream that rises progressively over time.

This stability of income can be achieved through the selection of investments with specific characteristics such as:

• High- quality corporate bonds with fixed coupons;

• Shares of quality companies whose management is committed to delivering rising dividends to its owners;

• Property assets with long-term rental agreements and infrastructure assets with inflation–linked contractual cash flows.

• Expect some short-term volatility and constrained returns

In order to achieve a sustainable income stream, however, investors do need to accept some short-term volatility in the capital value of their portfolio. There are many companies with dividends that are stable or rising but with share prices that nonetheless move through a 25% range over a year.

A strategy based on term deposits is exposed to high income variability over time but benefits from low capital volatility. This may suit investors with a specific short-term spending goal because their initial investment is safe. In saying this, it is a risky strategy for meeting the goal of achieving a sustainable income stream over an extended period. The fluctuations in cash rates are just too large.

While interest rates will undoubtedly rise again in the future, retirees also need to recognise that the average level of cash rates in the years ahead is most likely to be lower than our experience during the past 30 years.

Final thoughts

The most important thing is for people to be clear on what they’re trying to achieve and then identify an investment strategy best tuned to meet that goal. A financial adviser can help retirees identify and articulate their goals, recommend a strategy that is right for them and their circumstances, and help deal with the challenges and uncertainties on the journey.

About the Author

Jeff Rogers, Chief Investment Officer, ipac Investment Management
Jeff Rogers joined AMP Capital in 2011 from ipac Securities and he has over 27 years’ of investment management experience. Jeff holds a Bachelor of Science (Honours) from the University of Melbourne.

By AMP Capital

This move is probably two years away and the implications for Europe would be minimal as the EU is not the Eurozone. A vote for Britain to exit the EU is unlikely as it would spell bad news for the UK economy. In this article, we assess the impact on listed infrastructure and real estate securities.

Listed infrastructure

Within listed infrastructure we believe the market has already priced in most known risks in the lead-up to the election. These risks involved electricity assets in the context of restructuring the Office of Gas and Electricity Markets (OFGEM), and a potential price cap or cut. In the water sector, there were some risks from changes in The Water Services Regulation Authority (OFWAT). We do not envisage changing our position as a result of the election.

Listed real estate

In the last few months fears of a hung parliament, where no party would have the majority required to govern the country, had cast a shadow over an otherwise healthy real estate sector. With the uncertainty around protracted negotiations now abated, we believe this could result in a positive impact on the value of the British Pound, bonds and equity risk premiums. This is likely to translate into steady growth and market returns in listed real estate.

Here’s a brief round-up of what the budget could mean for your family finances—whether you’re starting out in your working life, building a career and family, or enjoying the fruits of your labours in retirement. 

But don’t forget—the proposals may change or not eventuate at all as legislation passes through parliament.

1.   Pension assets test thresholds

Proposed effective date: 1 January 2017

The government has announced the following changes to the pension assets tests thresholds:

In addition, once you exceed the lower assets test threshold the tapering rate will change from a $1.50 per $1,000 reduction to $3.00 per $1,000.

These changes impact not just the Age Pension but other pensions paid by both Centrelink and Department of Veterans’ Affairs such as the Disability Support Pension and the Carer Payment.

Based on the available numbers, we have made the following observations:

• Single pensioners who own their home with assets of less than $289,500 will receive an increased pension. Those with a higher level of assets will receive a reduction.

• Couple pensioners who own their home with assets of less than $451,500 will receive an increased pension. Those with a higher level of assets will receive a reduction.

Note: The above numbers are based solely on the assets test and the upper thresholds are based on an assumed rate of pension payment in 2017.

The budget announcement indicates that people who lose their pensions due to this measure will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card. At time of writing, there is no further detail as to how this will work or whether any other conditions will be attached to retain the card once it is received.

2.   Defined benefit (DB) pensions – deductible amount

Proposed effective date: 1 January 2016

Currently, people with DB pensions receive a deductible amount under the Centrelink income test which is based on the tax-free percentage of their income payments.

The government proposes that the amount of the tax-free proportion that can be excluded from the income test will be capped at 10% of the total value of the pension payment.

Recipients of Veterans’ Affairs pensions and/or DB income streams paid by military super funds are exempt from this measure.

3.   Aged care means testing

Proposed effective date: 1 July 2016

Currently, age care residents who rent out their former home and leave some of their Refundable Accommodation Deposit / Contribution outstanding, have their rental income exempted from the means tested care fee (MTCF) calculation. For residents who enter care from 1 July 2016, this exemption will be removed and the rental income will be counted towards the income component of the MTCF.

The cap on the asset value of the former home (currently $157,051) will continue.

Note: This change will not affect the Centrelink assessment of the rent on the former home for Age Pension purposes. That is, where the home is rented out and there is a Daily Accommodation Payment / Contribution, that rental income will remain exempt.

4.   Centrelink measures not proceeding

Proposed effective date: N/A

The following measures announced in the 2014-15 Federal Budget will not proceed:

• Resetting of the deeming thresholds to $30,000 for singles and $50,000 for pensioner couples.

• Freezing of the eligibility thresholds for pension payments for three years from 1 July 2017.

• Pension payments to be indexed by CPI from 1st September 2017. This means that pensions will continue to be indexed to the higher of the increases in the CPI, Male Total Average Weekly Earnings or the Pensioner and Beneficiary Living Cost Index.

5.   Reforming childcare payments

Proposed effective date: 1 July 2017

A new single Child Care Subsidy (CCS) will replace the Child Care Benefit, the Child Care Rebate and the Jobs, Education and Training Child Care Fee Assistance.

In addition to the CCS, the government will spend $869 million on the Child Care Safety Net to assist vulnerable, disadvantaged and additional needs children.

The CCS will provide financial assistance to meet the cost of child care for parents engaged in work, training, study or other recognised activity.

The table below outlines the annual caps applicable to various types of care

Family eligibility will be determined by an activity test, which aligns hours of subsidised care with the amount of work, training, study or other recognised activity undertaken.

Families with incomes of around $65,000 or less in 2017-18, who do not meet the activity test, will be eligible to receive up to 24 hours subsidised care per fortnight under the Child Care Safety Net.

To be eligible for the CCS, children must attend an approved child care service and meet immunisation requirements. The CCS will be paid directly to providers under these proposed arrangements.

6.   Nanny pilot programme

Proposed effective date: 1 July 2016

A proposed Nanny Pilot Programme will provide care for around 10,000 children whose families cannot easily access mainstream services for reasons such as shift work or living in rural and remote areas.

Families with an annual family income of less than $250,000 who meet the programme guideline requirements will be able to express interest in participating in the programme.

Families will receive a percentage (which varies depending on their family income) of the fixed hourly rate of $7.00 per hour per child, at the same assistance rate as proposed under the CCS and with the same activity test. Qualification criteria also apply for nannies wishing to participate in the programme.

7.   Removal of “double dipping” on paid parental leave (PPL)

Proposed effective date: 1 July 2016

Currently, eligible parents can receive both:

• government-funded Paid Parental Leave Pay (PPLP) scheme, and

• their employer-provided PPL scheme, if available.

The government has announced that it will remove the ability to “double dip”, by taking payments from both your employer and the government.

The government will ensure that all primary carers would have access to parental leave payments that are at least equal to the maximum PPLP benefit (currently 18 weeks at the national minimum wage).

8.   No new taxes on Superannuation

The Treasurer, during the delivery of his Federal Budget speech, confirmed that “there will be no new taxes on superannuation under this Government.

9.   Relaxing access to super – terminal medical condition

Proposed effective date: 1 July 2015

Currently, patients must have two medical practitioners (including a specialist) certify that they are likely to pass away within one year to gain unrestricted access to their superannuation.

The government will change this period to two years, giving terminally ill patients earlier access to their super.

10.       Tax cuts for small business

Proposed effective date: 1 July 2015

It is proposed to reduce the tax rate to 28.5% for companies with aggregated annual turnover less than $2 million. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30% rate on all their taxable income.

The current maximum franking credit rate for a distribution will remain unchanged at 30% for all companies, maintaining the existing arrangements for investors, such as self-funded retirees.

You’ll be eligible for a small business tax discount if you receive business income from an unincorporated business that has an aggregated annual turnover of less than $2 million. The discount will be 5% of the income tax payable on the business income received from an unincorporated small business. This discount will be capped at $1,000 per person for each income year and delivered as a tax offset.

Observation:

• The Budget papers suggest that the tax discount for unincorporated businesses may apply not only to sole traders but also include trusts and partnerships.

• ‘Aggregated annual turnover’ is generally defined as gross sales less GST.

11.       Immediate tax deductions for assets under $20,000

Proposed effective date: 7:30pm (AEST) – 12 May 2015

It is proposed to expand accelerated depreciation by allowing small businesses with aggregate annual turnover of less than $2 million to immediately deduct assets that cost less than $20,000.

This will apply for each asset acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017. From 1 July 2017, the thresholds for the immediate depreciation of assets will revert back to existing arrangements.

12.       Capital Gains Tax (CGT) roll-over relief for business entity restructures

Proposed effective date: 1 July 2016

It is proposed to allow small businesses with an aggregated annual turnover of less than $2 million to change legal structure without attracting a CGT liability at that point. This measure will be available for businesses that change entity type from the 2016-17 income year.

Observation:

• Currently, CGT roll-over relief is available for people who subsequently incorporate, but all other entity type changes have the potential to trigger a CGT liability. This proposal recognises that new small businesses might choose an initial legal structure that they later find does not suit them when the business is more established.

13.       Fringe Benefits Tax (FBT) changes for work-related electronic devices

Proposed effective date: 1 April 2016

It is proposed to allow a FBT exemption for small businesses with an aggregated annual turnover of less than $2 million that provide employees with more than one qualifying work-related portable electronic device, even where the items have substantially similar functions.

Observation:

• Currently, an FBT exemption can apply to more than one portable electronic device used primarily for work purposes, but only where the devices perform substantially different functions.

14.       Immediate deductibility for some business establishment costs

Proposed effective date: 1 July 2015

It is proposed to allow businesses to immediately deduct a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice.

Observation:

• Currently, some professional costs associated with a new business start-up are deducted over a five year period. Allowing start-ups to immediately deduct these expenses will provide needed cash flow for these new businesses.

 15.       No change to personal income tax rates

Personal income tax rates for 2015-16:

Note: the Temporary Budget Repair Levy has not been extended beyond 30 June 2017.

16.       New cap for certain exempt fringe benefits

Proposed effective date: 1 April 2016

Changes are proposed to meal entertainment fringe benefits provided by tax exempt employers.

Tax exempt employers include Public Benevolent Institutions, health promotion charities, public hospitals and hospitals operated by non-profit organisations and public ambulance services.

A meal entertainment fringe benefit consists of an employer providing or reimbursing expenditure for entertainment by way of food or drink (e.g. restaurant) and/or travel and accommodation expenses associated with the entertainment.

This proposal will cap the amount of such benefits that can be provided by tax exempt employers  free of Fringe Benefits Tax (FBT) to $5,000 annually per employee. Meal entertainment expenses packaged in excess of this amount will be subject to full FBT or counted within the existing FBT concession cap.

Employees of these FBT exempt or rebatable employers continue to have access to capped FBT exemptions for a wide range of other benefits.

17.       Taxation of Employee Share Schemes (ESS)

Proposed effective date: 1 July 2015

In March 2015, Treasury released draft legislation to amend certain aspects of ESS legislation.

Following consultation, some additional measures have been announced.

The main aim of the amendments are to make it easier for small, start-up businesses to offer non-cash remuneration, i.e. share or option plans with concessional tax treatment. The concession will be extended to unlisted companies that were incorporated less than ten years before the share/right was acquired and have turnover of less than $50 million in the year prior to the ESS interest being acquired.

Observation:

• These measures are designed to make ESSs a more appealing way of remunerating employees and aligning employee interests with those of employers through shared ownership in the business. Some measures are particularly aimed at start-up companies who historically have used option plans to remunerate employees at a time when business cash flow may not be sufficient to sustain appropriate salaries. Current legislation makes it unattractive to offer options as part of an ESS.

18.       Increasing Medicare levy low income thresholds

Proposed effective date: 1 July 2014

For the 2014-15 year, the Medicare levy low income threshold will be indexed.

For singles, the threshold will increase to $20,896 and for couples $35,261 plus $3,238 for each dependent child. For single seniors and pensioners the threshold will increase to $33,044.

Taxpayers whose taxable income is below the relevant threshold are not liable for the Medicare levy.

19.       Work related car expense tax deductions

Proposed effective date: 1 July 2015

The methods available for calculating work related car expense tax deductions will be rationalised.

This change has no effect on car leasing and salary sacrifice/fringe benefits arrangements.

Currently, there are four methods of claiming work related car expenses.

• Both the ‘12% of original value method’ and one third of actual expenses method’ will no longer be available.

•  The existing ‘cents per kilometer method’ will remain, but at a flat rate of 66 cents per kilometer applied to up to 5,000 ‘business’ kilometers – this flat rate replaces three current rates based on engine size. The Australian Taxation Office (ATO) will update the cents per kilometer rate in following years.

• The ‘log book method’ for claiming deductible car expenses will remain available.

What you need to know

Any advice in this document is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the product disclosure statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.0 per cent, effective 6 May 2015.

The global economy is expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply. These trends appear largely to reflect increased supply, including from Australia. Australia's terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are stepping up the pace of unconventional policy measures. Hence, financial conditions remain very accommodative globally, with long-term borrowing rates for sovereigns and creditworthy private borrowers remarkably low.

In Australia, the available information suggests improved trends in household demand over the past six months and stronger growth in employment. Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year. Public spending is also scheduled to be subdued. The economy is therefore likely to be operating with a degree of spare capacity for some time yet. Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late. Growth in lending to the housing market has been steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

At today's meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.

Source:
RBA Media Release 5/5/15

By AMP Capital Markets

The European Central Bank (ECB) and Bank of Japan (BoJ) are lowering cash rates or easing monetary policy¹ at a time when the US Federal Reserve is gradually edging towards raising rates.

Global divergence: US / Europe and Japan

The story of 2014 was a divergence in growth opening up amongst the key developed economies. The weakness in Europe and Japan brought renewed economic stimulus in the form of monetary easing. The outlook for 2015 will be determined by the extent to which easing monetary conditions bring about a coordinated period of stronger global growth..

• US: Towards the end of 2014, as the labour market gained strength, The Federal Open Market Committee (FOMC) ended its program of steadily purchasing government bonds to support mortgage markets and promote a stronger economic recovery. Despite benign wage growth and early signs that the lower oil price is exerting downward pressure on core inflation, the FOMC is expected to raise interest rates, possibly towards the second half of the year.

• Europe: Core inflation became uncomfortably low and inflation expectations were falling in the Eurozone before the dramatic slump in the price of oil. As a result, the ECB stepped up its easing efforts in 2014 with interest rate cuts, including the introduction of a negative deposit rate. More recently, the ECB announced plans to make purchases of 60 billion euros per month until at least September 2016. It will be expecting the expansion of the monetary base, lower yields and greater liquidity support for asset prices to all contribute to stronger credit and GDP growth.

• Japan: From a policy perspective, the BoJ has committed to purchasing more short-term and long-term government bonds. It has also been supplying loan funds to stimulate commercial banks’ lending to the private sector. Recently, the BoJ voted to continue implementing money market operations so that the monetary base (supply of money) will increase at an annual pace of ¥80 trillion. The decision, which was in line with market expectations, is aimed at meeting the BoJ’s inflation target of 2.0%.

What does this mean for Australia?

Worries about deflation and negative yields in many parts of the world have seen an increasing demand for safe income yielding assets, particularly as populations in developed countries age. As a result, yields in ‘safe’ high yielding countries like Australia are being pushed towards convergence with low yielding countries by global investors chasing yield. While valuations are becoming increasingly expensive, the overall repricing of inflationary expectations globally has provided persistent support for the bond market.

The key unknown for Australia is China. China is suffering from ongoing excess capacity and this means global bond prices will stay very low. It also means an ongoing weak outlook for Australian exports and the terms of trade. Easy policy from the Reserve Bank of Australia will be needed to facilitate the rebalancing of the Australian economy away from a reliance on mining investment.

A pick-up in growth will likely see bond yields rise

Collapsing oil prices and sluggish growth are helping keep inflation low and stoking deflation fears. This has led to a period of extremely low interest rates globally. In the short-term, we expect government bond markets (and hence base yields) to remain somewhat supported due to central bank activity and the absence of a pick-up in inflation. This will see spreads for corporate bonds compress in this continued ‘search for yield’ environment. In the medium to longer-term, we continue to believe that a growth rebound in major developed economies will lead to a gradual move higher in bond yields, which means that prices are expected to fall.

1. A country’s central bank is responsible for monetary policy. Monetary policy involves setting the interest rate on overnight loans in the money market (the cash rate). The cash rate influences other interest rates in the economy, affecting the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation. Controlling inflation preserves the value of money and encourages strong and sustainable growth in the economy over the longer term.

About the Author

Simon Warner, Head of Fixed Income at AMP Capital is responsible for the management of AMP Capital’s active fixed income strategies including macro markets, credit markets, commercial lending and protected growth, managing nearly 30 investment professionals across Australia, New Zealand, Hong Kong and the US.