According to Mr Keith, another interest rate rise is possible after the Reserve Bank of Australia Governor Michele Bullock said in an Opening Statement to the House of Representatives Standing Committee on Economics^[1] that inflation has not been this high for a few decades and is hurting everyone.

“I think many people have forgotten how bad it is – some younger people will not have experienced high inflation at all. There is a reason why there is so much talk about the cost of living – high inflation hurts everyone,” she said.

“It reduces what people can buy with their wages, erodes the value of savings, and it disproportionately hurts those on low or fixed incomes. This is why it is imperative that we do what we need to ensure inflation returns to levels at which it is in the background again,” Ms Bullock said.

“Ultimately, our full employment goal is not served by letting inflation stay above target indefinitely. So, the Board remains focused on the potential upside risks to inflation.”

According to Mr Keith, with another rate rise potentially looming, Australians need to be prepared to take action on their investments to achieve higher returns.

“Arguably those close to retirement should be devoting more of their investment portfolios to fixed income assets including private credit to boost the after-tax return on savings,” Mr Keith said. Private credit investments, with returns driven by corporate loans, benefit from higher interest rates given rates on such loans typically pay floating coupons, or returns that are linked to official interest rates. So arguably retirees’ investment strategies and those of self-managed superannuation funds should consider diversification into private credit investments, which can deliver investors yields close to 10% per annum.”

“This is especially appealing for investors seeking income, given term deposits are generally currently returning less than 5%. The average advertised interest rate on three-year term deposits was just 3.95% in July 2024, and the one-year rate was a little higher at 4.60%, slightly above the official inflation rate of 3.8%, according to data from the Reserve Bank^[2] .  In contrast, the yield earned on private credit could increase over the next 12 months, with current returns of 8% to 10%” Mr Keith said.

More defensive assets such as fixed income, and private credit particularly, may deliver more attractive yields than property, cash or fully-franked shares. That’s important because it is income-yielding assets that will support Australians in everyday living and in retirement.”

It’s important for investors to consider that not all private credit funds are the same, and that before investing they are satisfied that the fund manager has a stringent loan qualification process, excess protection for investors via mortgage security, adequate liquidity and is transparent with investors on the loan portfolio they manage within the private credit fund.

With returns in the range of 8% to 10% in the private credit market, private credit is offering ‘equity-like’ returns which is drawing investors into this growing asset class, according to Mr Keith. “We see the demand for private credit remaining high from both borrwers and investors. As the returns in private credit are driven by the demand for credit from borrowers as well as the premium to the RBA cash rate, we don’t see either of those two things changing in the near future. For income seeking investors who are willing to take on more risk than that involved with cash or term deposits, private credit investments can deliver investors yields significantly above the yields on rental properties which often fall below 5%,” Mr Keith said.

However, investors in private credit need to fully consider their liquidity needs and capital protection offered by the fund before investing in private credit. A key factor for investors is to ensure their fund manager invests their capital well and protects it through security over the loans, including mortgages over property and general security agreements over the business assets in which the fund invests.

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Notes:
[1] https://www.rba.gov.au/speeches/2024/sp-gov-2024-08-16.html?&utm_source=rbanews&utm_medium=email&utm_campaign=speech-gov-2024&utm_content=house-of-reps-hearing-aug
[2] https://www.rba.gov.au/statistics/tables/xls/f04hist.xlsx?v=2024-08-16-11-56-40

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