ASIC Report 353: Further review of term deposits (REP 353) follows an earlier review and report ASIC released in February 2010,Report 185: Review of term deposits (REP 185), that found aspects of disclosure that were of concern to ASIC (refer 10-37AD).

The key risk for investors is that at the end of the term, their term deposit can roll over automatically from a high interest rate to a much lower interest rate. This is a result of the combination of the practice of dual pricing by authorised deposit-taking institutions (ADIs) and the automatic rollover of term deposits. Dual pricing is when ADIs promote their term deposits by advertising the high rates available on a limited number of term deposit periods, while maintaining significantly lower rates for all other deposit periods. 

REP 353 found:

• The eight ADIs reviewed have generally implemented ASIC’s recommendations to improve disclosure. All eight now disclose the risk of dual pricing in terms and conditions documents and in at least one mode of investor communications. All eight also disclose the existence of grace periods in pre-maturity and/or post-maturity letters, and most also tell investors the actual or indicative interest rate that will apply to their new term deposit before it rolls over
• ADIs still use dual pricing so the risk of rolling over into a low interest rate remains. However, now, more of the available terms (one month, two months etc) have high interest rates applicable, so even on an automatic rollover, the risk of rolling into a low rate is reduced
• there were fewer default rollovers from ‘high’ to ‘low’ interest rates. In the 7 months of the review, 11% of default rollovers involving a total of $1.9 billion rolled into low interest rate deposits. In our earlier review, which covered a 14 month period, 47% of default rollovers, involving $7.88 billion rolled into low rate deposits, and
• investors made significant use of grace periods with a total of $97 billion of investors’ funds being re-lodged or cancelled during the grace periods which are available and are now better disclosed.

Deputy Chairman Peter Kell welcomed the fact that industry has largely adopted ASIC’s recommendations whilst noting the need for continued monitoring of the effectiveness of the disclosures being made. 

‘It is essential that investors are provided with timely information about the risks and the return they will get if they let their deposit rollover’. 

Mr Kell also highlighted the need for ongoing vigilance by investors using term deposits. 

‘While term deposits are generally a safe, low-risk investment, they should not be a set-and-forget investment, and investors should still shop around to see what other rates are available’.

ASIC will continue to monitor the term deposit market to encourage further improvements to disclosure, including by ADIs which did not participate in our review.

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• Excluding volatile items, the inflation gauge was unchanged in September. On all measures, annual inflation is around 2.3-2.4 per cent.
• The Performance of Manufacturing index fell by 1.2 points to 44.1 in September. It was the seventh month that the index has been below a reading of 50 points, suggesting contraction in the sector. The index of selling prices fell from 45.8 to a decade low of 41.2.
• The daily RP Data-Rismark home value index rose by 1.4 per cent over September.
• Chinese manufacturing sector improves, with the official Purchasing Managers index for China rose from 49.2 to 49.8 in September, matching forecasts.

What does it all mean?

• Inflationary pressures are still well-contained, keeping the door open for a rate cut in the next few months. While we favour a move in November rather than October, we don’t hold the view too tightly. The latest survey shows manufacturing is still contracting, the services gauge will probably show a similar contraction this week, and inflation is contained. But on the other hand, economic growth is close to ‘trend’, home prices are rising, business lending is creeping higher, the Aussie dollar has eased in recent weeks and the global economic situation is improving.
• A forward-looking Reserve Bank probably still sees the glass as “half-full” rather than “half-empty”, suggesting that it will wait at least another month before cutting rates. In short, if the economy is not crying out for more stimulus, then why act? Better to keep the bullets in the gun in case they are needed in future months.
• Certainly the next batch of monthly home price data is likely to show firmer growth. The RP Data-Rismark home value index for September will be published tomorrow and may show a 1.4 per cent lift in Australian home prices for the month based on the daily observations of the series.

What do the figures show?

• The monthly inflation gauge rose by 0.2 per cent in September after a 0.6 per cent increase in August. The annual rate of inflation rose from 2.2 per cent to 2.4 per cent.
• The underlying rate (trimmed mean) rose by 0.1 per cent in September after a 0.6 per cent gain in August. The annual rate rose from 2.2 per cent to 2.3 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the inflation gauge was unchanged in September after a 0.2 per cent rise in August. The tradable inflation measure rose by 0.4 per cent and the non-tradable inflation measure increased by 0.1 per cent in September. The annual rate of the measure excluding volatile items eased from 2.6 per cent to 2.4 per cent.
• TD Securities noted that “Contributing to the overall change in September were price rises for fruit and vegetables, domestic holiday travel and accommodation, and automotive fuel. These were offset by falls in rents, footwear, and audio, visual and computing equipment and services. The price of fruit and vegetables rose by 6.3 per cent in September.”
• The report also noted: “We have still not noticed any broad-based impact of the 1 July introduction of carbon pricing spilling over into prices this month. However, we will continue to watch for any evidence of more pass through to consumers in the months ahead.”
• TD Securities have finalised inflation forecasts: “With this September report we have finalised our CPI forecasts for the September quarter. We forecast headline inflation to increase by 0.8 per cent, to be 1.4 per cent higher than a year ago. We forecast underlying inflation to increase by 0.5 per cent in the quarter, lifting the annual rate slightly from 2.0 per cent to 2.1 per cent. We anticipate underlying inflation to remain closer to 2 per cent than 2.5 per cent by year-end.”

What is the importance of the economic data?

• The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.
• The Australian Industry Group and PricewaterhouseCoopers compile the Performance of Manufacturing Index (PMI) each month. The Australian PMI is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• It’s always important to remember that the Reserve Bank has to be forward looking when deciding on interest rate settings. While conditions in manufacturing, services and construction are soft at present, home prices are now rising solidly and the global economy appears to be settling. While it is a close call whether the Reserve Bank cuts rates tomorrow, on balance we believe it will probably wait a little longer before deciding on a rate cut.
• The lift in home prices is clearly good news for housing-dependent sectors.

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• Government handouts to families and seniors contributed to a record monthly budget deficit of $14.4 billion in June.
• Receipts from the goods and services tax were $1,059 million above the estimate in the 2012/13 budget. The GST receipts of $48.8 billion were up 1.6 per cent on a year earlier.

What does it all mean?

• The good news is that the federal budget is headed back towards surplus, although this may not appear obvious from the latest figures. In the year to May, the federal budget was in deficit by $34.1 billion, having improved in eight of the previous nine months, and down from a record $63.3 billion deficit in the year to September 2010. But there was a hiccup in June as the government provided a number of handouts to Aussie consumers, the annual deficit coming in at just under $44 billion.
• Still, the underlying deficit continues to improve. The government has shifted some payments into 2011/12, and delayed or cancelled other spending scheduled for 2012/13. A combination of firm revenue growth and flat expenses should push the budget back towards surplus.
• It’s always important to remember that the budget is merely an accounting statement of government finances. In essence, things can go wrong. And while the budget is considered an economic document, it’s also a political document as well, with the government of the day deciding what to spend on a when.
• In May 2011 a budget deficit of $22.6 billion was project. At the mid-year review the projection had blown out to $37.1 billion and in the May 2012 budget the projection had lifted to a $44.4 billion shortfall. Currently a small $1.5 billion surplus is projected for 2012/13.
• From an economic perspective it is encouraging that underlying revenues are continuing to improve with firmer economic growth. Weaker commodity prices mean that the path to surplus less assured, but much also depends on the job market remaining firm and consumers continuing to spend. CommSec tracks the monthly budget statements and figures for July and August should be available over the next month. So we should soon be in a position to see if the surplus goal remains achievable.
• At three per cent of GDP, it is important to stress that Australia’s budget is in far better shape than most advanced nations. Similarly Australia’s net government debt level of 10 per cent is well at the bottom end of the pack.

What do the figures show?

• The Australian federal budget was in deficit by $43.7 billion in 2011/12. At the time of the release of the 2013 Federal Budget in May, the Government had forecast a deficit of $44.4 billion for the 2011/12 year.
  The underlying budget deficit improved by $4 billion over 2011/12, from a deficit of $47.7 billion (3.4 per cent of GDP) in the 2010/11 year.
• Receipts rose by 9.2 per cent to $329.9 billion while payments rose by 7.2 per cent to $371 billion. Future Fund earnings eased from $3.7 billion to $2.6 billion.
• The headline cash balance improved from a $51.1 billion deficit to $47.0 billion deficit in 2011/12. And the fiscal balance improved from a deficit of $51.5 billion (3.7 per cent of GDP) in 2010/11 to a deficit of $44.5 billion (3.0 per cent of GDP) in 2011/12.
• Australian Government general government sector net debt was $147.3 billion (10.0 per cent of GDP), which was $4.8 billion higher than estimated at the time of the 2012/13 Budget.
• Australian Government general government sector net financial worth was minus $358.3 billion at the end of 2011/12. Net worth was minus $247.2 billion at the end of 2011/12.
• Receipts from the goods and services tax were $1,059 million above the estimate in the 2012/13 budget. The GST receipts of $48.8 billion were up 1.6 per cent on a year earlier.

What is the importance of the economic data?

• The Federal Government is required to release the Final Budget Outcome by the end of September each year. The data may have implications for fiscal policy – government spending and taxing – if the figures deviate from official expectations.

What are the implications for interest rates and investors?

• It may not appear obvious, but the goal of a budget surplus is still on track. And if spending remains restrained over the coming year while revenues continue to recover, then fiscal policy will be regarded as contractionary, thus keeping the door open for another rate cut.
• The latest budget result is a “good news” outcome, thus the release of the figures on a Monday, rather than Friday afternoon as is traditional with monthly budget statements.
• GST revenues grew in line with inflation over the past year – effectively translating to no growth in real terms. State governments have been complaining about lack of funds to meet on-going spending demands and infrastructure commitments. But if recent settled conditions on global markets continue, there are hopes that consumers and businesses will spend more freely over the coming year, meaning more GST revenue.

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The report refers to the Reserve Bank of Australia’s (RBA) anticipated decision to keep the cash rate on hold with expected growth to remain close to trend and inflation to remain consistent with target.

The Australian dollar remains strong at $1.06, its highest level since March; however the RBA is concerned about the strength of the Australian dollar and its contrast with the weakening in global growth. With policy rates at 3.5%, the RBA has more room than other central banks to provide stimulus, putting it in a relatively comfortable position.

Included in the report, are analyses of central banks in the US, UK, Europe, Japan and Canada.

To read the entire report, please click here.

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• The majority of Aussies believe that the wisest place for savings is in the bank (39.0 per cent of respondents) – the highest level in 38 years. Next favoured was “paying off debt” (20.4 per cent). Spending any additional savings was only seen as the wisest choice by 3.6 per cent of respondents – the weakest reading in six years.
• Generation Y was surprisingly downbeat. Sentiment in the 18-24 age group slumped by 12.9 per cent in September to an index reading of just 95.3.
• Australian dwelling starts rose by 4.6 per cent in the June quarter. Private sector commencements were up 5.0 per cent in the quarter with house starts down 1.7 per cent and apartment starts up 19.0 per cent. House starts stood at the lowest levels in 11 years in the June quarter.
• Over the year to June, 139,349 dwellings were commenced down 2.7 per cent on the prior year.

What does it all mean?
Welcome to the multispeed economy. Top-line consumer sentiment recorded a modest rise in the latest month, however that is a far as the good news goes. In fact delve into the data a little further and the rest of the results look disappointingly weak.

The recent high-profile cost-cutting measures taken by the mining sector seem to have weighed on consumer psychology, especially when coupled with the ongoing weakness in across other parts of the economy. Given the extent of the fiscal and monetary stimulus over the past couple of months you could argue that sentiment levels should be far higher, but the average Aussie is still not convinced that the outlook is all that rosy.

In fact the latest readings on what consumers would do with any additional savings suggest that consumer conservatism is going ahead in leaps and bounds. Almost two thirds of Aussies believe the wisest place for new savings is in the bank or paying off debt, marking the highest reading since the mid-1970’s.

In addition the amount of respondents that believe that spending any additional savings is the wisest action fell to the lowest reading in six years. It is clear that the ongoing global economic concerns, weakness across an array of sectors and a sluggish labour market are seeing households retreat further into their shell.

Encouragingly real estate is still in favour (although less so than last quarter) – and with rates stable, the jobless rate low, no oversupply of properties and lower house prices over the past year, there are plenty of good reasons to be looking at property.

Why is Generation Y so glum? In the space of a month, sentiment in the 18-24 age grouping slumped by almost 13 per cent while sentiment was flat or a little bit more upbeat across other age groupings. There is no seasonality in the result to suggest that any one reason was responsible for the more downbeat view. But it may be the ongoing sluggishness in the job market is making it more difficult to find part-time or full-time work. But a large portion of the 18-24 age group attend universities and other education centres, so it is difficult to get a handle on the pessimistic result, however it will be interesting to see if the view is portrayed in coming months.

Viewed over a longer-term perspective it is still more the case that confidence is not getting much worse, but also not getting much better. It will take a longer period of global financial stability to calm the jangled nerves of Aussie shoppers.

If anyone has a reason to be glum in recent times, it’s builders, tradespeople and housing dependent business operators. Over the past year it seemed like people preferred to rent, live at home longer or buy existing properties rather than to build. In fact over the year to June just over 139,000 dwellings were commenced – marking the weakest annual result in three years. However there maybe signs that activity levels are starting to turn. Dwelling commencements rose by just shy of 5 per cent in the June quarter, marking the first increase since March last year. And looking forward, the lower interest rates on offer, the best housing affordability in a decade, rising migration and population growth as well as grants and incentives provided by some state governments should support a stronger period of residential building over the coming year.

What do the figures show?
Consumer sentiment:

• The Westpac/Melbourne Institute index of consumer sentiment rose 1.6 per cent to a reading of 98.5 in September after sliding by 2.5 per cent in August. The index is 1.3 per cent higher than a year ago.
• The current conditions index fell by 0.1 per cent, while the expectations index rose by 2.9 per cent.
• Only one of five components of the index fell in September:
  The estimate of family finances compared with a year ago rose by 0.3 per cent;
  The estimate of family finances over the next year rose by 4.8 per cent;
  Economic conditions over the next 12 months rose by 0.6 per cent;
  Economic conditions over the next 5 years rose by 3.4 per cent;
  The measure on whether it was a good time to buy a major household item fell by 0.4 per cent.

Gender & demographics:

• Men (index reading of 101.7) were more optimistic than women (94.7). Young people (18-24 years) were less optimistic in September (index down 12.9 per cent to 95.3). Across the other demographics: 25-44 years, (index 105.1, up 11.5 per cent); 45 years plus (index 93.1, down 3.2 per cent).
• The time to buy a dwelling index fell by 0.3 per cent in September and the time to buy a car index rose by 1.1 per cent.
• Aussie consumers believe that bank deposits are the wisest place for savings (39.0 per cent of respondents) –the highest reading since 1974, followed by paying debt (20.4 per cent), real estate (19.8 per cent), and shares (5.5 per cent).

Dwelling commencements

• The number of dwelling commencements rose for the first time in five quarters, rising by 4.6 per cent in the June quarter, but this was still 10.8 per cent lower than a year ago. Private sector houses fell by 1.7 per cent to 11-year lows while apartment starts rose by 19.0 per cent.
• In the June quarter starts rose the most in the Northern Territory (up 68.1 per cent) followed by NSW (up 25.9 per cent), Queensland (up 8.1 per cent), and Victoria (up 2.8 per cent). Starts fell the most in South Australia (down 9.3 per cent), followed by Western Australia (down 6.1 per cent), Tasmania (down 5.0 per cent) and the ACT (down 1.0 per cent).
• Over the year to June 139,349 dwellings were commenced down 2.7 per cent on the prior year.

What is the importance of the economic data?

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
• The ABS figures on dwelling commencements are compiled on the basis of returns collected from builders and other individuals and organisations engaged in building activity. The data is useful in highlighting activity levels in residential construction.

What are the implications for interest rates and investors?

• The Reserve Bank will probably be a bit disappointed at the latest consumer confidence results. There are plenty of good reasons for Aussies to be encouraged by the state of their economy, but we are still seeing the glass as half-empty rather than half-full.
• CommSec expects the Reserve Bank to maintain its easing bias but it may not follow through with another rate cut until later in the year. Europe, the level of the Aussie dollar and the Chinese economic recovery are the key issues affecting interest rate decisions.
• The outlook for retailers is mixed. Consumer confidence is OK without being great, but wages are rising at a faster rate than prices. Add in the fact that unemployment is low, interest rates could be cut again, home prices are lifting gradually, the sharemarket has stabilised and the Aussie dollar is strong. Overall, consumers need to be positive about their finances before retailers can become more confident on future spending.

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• The variable housing rate is applying modest stimulus to the economy at present at 6.85 per cent, below the 15-year average of 7.20 per cent. The next RBA Board meeting is on October 2 2012.
• The Reserve Bank focussed on global developments: Regarding China “some recent indicators have been weaker, which has added to uncertainty about near-term growth. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”

What does it all mean?
It is clear that the Reserve Bank is happy to remain on the interest rate sidelines – at least for the time being. Policymakers seem comfortable with domestic economic conditions but continue to watch the global situation carefully. Europe, the US and Asia have slowed and the central bank seems particularly focused on the slowdown in China, given its importance to Australia’s growth profile.

There are yet to be credible signs that of a turnaround in Chinese activity. In fact the latest manufacturing data suggested that the contraction in exports continues to affect the growth profile of the biggest consumer of Australian raw materials. Interestingly the statement accompanying the “no change” decision highlighted that Board members discussed the sharp slide in “key natural resources”. And looking forward if a further severe decline in the commodity prices took place the Reserve Bank would reassess its economic outlook given a less robust boost to incomes.

At present, the fact that the Reserve Bank is content to stay on the interest rate sidelines is a mark of confidence in current settings. Not only have interest rates been lowered in recent months but there have also been government handouts and tax cuts. And it takes time for these stimulus measures to work its way through the economy.

Despite the fact that interest rate have remained unchanged for three consecutive months it is unlikely to be the end of the interest rate cutting profile. In fact market pricing is now for a full 1 per cent worth of rate cuts over the next 12 months. And one could argue that there are plenty of domestic reasons for the Reserve Bank to be cutting rates in the next couple of months – particularly given the slide in the latest round of retail sales figures and ongoing weakness in job advertisements.

However the Reserve Bank still holds to the central view that the longer-term outlook for the Australian economy remains sounds and the latest upgrade to domestic growth forecasts in the monetary policy statement confirmed that view. As such, while rate cuts are still likely it will be a much more considered response.

CommSec believes that more rate cuts are possible over coming months and we have pencilled in another quarter per cent rate cut in November – after the next round of inflation data. Hopefully this rate cut won’t be required. That is, European officials act with urgency to stabilise financial markets, the US economic recovery gathers pace, the Chinese economy lifts and Aussie consumer confidence improves providing a catalyst to spend, invest and borrow again. But a lot does have to go right for this scenario to take place.

Interest rate decision and past cycles
The Reserve Bank Board has left the cash rate at 3.50 per cent. The previous rate cuts were in June (25 basis points), May (50 basis points) and November and December 2011 (each by 25 basis points). Prior to those moves the Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.

In the last rate-cutting cycle the cash rate fell to a low of 3.00 per cent in April 2009. In the previous rate-cutting cycle the cash rate fell to 4.25 per cent in December 2001. In the two previous rate-cutting cycles, the cash rate fell to lows of 4.75 per cent.

The Reserve Bank now looks more closely at the variable housing rate to gauge how close rates are to “normal”. Currently the variable housing rates of major banks are around 6.85 per cent, below the long-term average or “normal” rate of 7.20 per cent. The RBA notes that “interest rates for borrowers (are) a little below their medium-term averages.” In other words stimulus is still very modest.

What are the implications of today’s decision?
The fiscal and monetary stimulus applied over the last few months will gradually work its way through the economy in coming months, however given the downside risk to global growth it likely that policymakers will maintain an easing bias. CommSec expects rates to be cut once more within the next three months.

For some consumers and businesses confidence is generated when the Reserve Bank Board decides to cut interest rates. But the fact that the Reserve Bank didn’t cut rates this month arguably should inspire even greater confidence. Inflation is below 2 per cent, unemployment is near 5 per cent, and economic growth is the fastest of advanced nations. There is plenty to inspire confidence.

But make no mistake; the Reserve Bank is well prepared to cut rates again if necessary. The global outlook is still uncertain. At the same time the Aussie dollar remains high despite “the weaker global outlook”.

And inflation remains low – although the Reserve Bank warns that growth in domestic costs need to keep moderating. Certainly our cash rate is still high compared with other nations at 3.50 per cent, so there is plenty of ammunition available.

The Reserve Bank seems to be waiting on the next round of inflation data which is released at the end of October before deciding on further rate cuts. A low inflation reading would allow policymakers to feel more comfortable about cutting rates in coming months, if they deem it is necessary.

Retailers are likely to find trading condition tough in the short-term an improvement in confidence will be required to see a sustained shift in spending patterns.

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“While all available research shows that investors have been focused on cash as the best safe haven to protect capital, falling interest rates are making such a strategy increasingly unsound. 

“Having some investment in cash products such as term deposits may be sensible for some investors, but it should always be as part of a balanced diversification strategy. 

“Falling interest rates and inflation combine to reduce both the value of capital and income – exactly what investors seeking a ‘safe haven’ are trying to avoid,” he said. 

Mr Bryant said that an urgent rethink is needed by many investors to redefine what a ‘safe haven’ means to them and what the cost might be of the various options, as well as the opportunities other asset classes offer. 

“Now is not a good time to be over-invested in cash products.  They might offer surety of capital being repaid on a due date but the cost can be considerable, and this together with other factors shouldn’t be ignored by investors. 

“Ease of access, income stability, inflation protection, capital growth as well as security, can all be important to investors depending on their circumstances and financial needs,” he said. 

Mr Bryant says that investors need to understand circumstances change and at the moment an over-cautious approach – such as having all their savings in term deposits – now comes with a major opportunity cost. 

“For example, fixed interest funds have performed better than term deposits in the last four years (since the flight to cash started in earnest) and equities have given better yields than term deposits over the same period, particularly for investors on higher tax rates. 

“Indeed, an investor who put some of their wealth in bank shares in June 2008 rather than depositing all their money in interest-bearing term accounts, would have received excellent yield as well as capital growth. 

“For example, if an investor had deposited $10,000 in a one-year term deposit in June 2008, and reinvested maturity proceeds along the way, this would have increased in value to $12,519 by June 2012. However, if an investor bought $10,000 of CBA shares in June 2008 it would be worth $18,819 including franking credits, in June 2012 – and we have seen even more increases in sharemarket value in the last couple of months.” 

Mr Bryant added that diversification is always the best approach no matter what the economic situation is. 

“There is currently a notable degree of optimism in the main growth asset classes that investors should factor into any portfolio rebalancing. 

“While there is still volatility in equity markets, and although markets are still experiencing frequent falls, there appears to be the beginning of an underlying trend upwards,” he said. 

“In addition, property markets appear to be shaking off the stagnancy of recent years as an inability to satisfy future demand is becoming apparent in some sectors, for example office, healthcare and retirement living. 

“Investors who have remained in cash over the last several years now need to reassess their priorities as they face falling returns coupled with an erosion of capital value. 

“Moving to a more diversified investment approach at the moment is likely to provide the access, income stability, protection and capital growth that have become the priorities for many investors,” Mr Bryant said.

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Overall it is clear that the Reserve Bank is currently happy with interest rate settings. Inflation remains consistent with the 2-3 per cent target, economic growth is close to trend and financial conditions had eased following recent rate cuts. In short, the Reserve Bank won’t be cutting rates any time soon unless the global economy worsens.

What does it all mean?

• Overall, it is clear that the Reserve Bank is sitting comfortably on the interest rate sidelines. Policymakers seem more comfortable with domestic economic conditions but continue to watch the global situation carefully. Europe, the US and Asia have slowed but the situation in China has appeared to stabilise.
• There is nothing new for investors. If interest rates were to change, it would be down. CommSec continues to factor in the risk of a rate cut in November, but it is still more a risk than anything else. The Reserve Bank seems happy with monetary settings.
• The key factors that could prompt a rate cut are a new crisis in Europe, deterioration of the US or Chinese economies, or a sharply higher Aussie dollar.
• The Reserve Bank is comforted by the “noticeable” lift in business borrowing and pickup in consumer spending. Still it notes temporary factors had boosted spending and the Bank is still monitoring the exchange rate which remains high despite the weakening of the global economy.
• There was further acknowledgement of the “patchwork” economy: “activity continued to vary significantly across industries”. The resource sector was OK but the high Aussie dollar hurt other industries while there were “weak conditions in the housing market.”
• There were particularly positive comments on resource projects: “Members were informed that additional large resource projects had commenced or received approval in recent months, thereby sustaining the very large stock of work in the pipeline.”
• The Reserve Bank noted the temporary boost to spending from government payments over May and June and noted “tentative” signs of improvement in housing.
• Reserve Bank concern about Aussie dollar strength is still subtle. The RBA Board noted the stronger Aussie dollar, boosted by foreign purchases, with the trade weighted index back near highs, “notwithstanding the decline in the terms of trade and the weaker global outlook.”

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However, bank term deposit rates have fallen and are likely to fall further, possibly to around 4%, as the RBA continues to reduce the cash rate to help the economy. So it makes sense to look elsewhere.

Our view is that the RBA will cut official interest rates from 3.5% currently to 3% or just below over the next six months on the back of sub-par business and consumer confidence, disappointing growth and benign inflation. While the RBA is currently putting out a relaxed and comfortable message it should be noted that it put out a similar message earlier this year only to commence cutting interest rates again in May.

To read more about investments that might deliver a decent yield, click here.

30 July 2012

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Tim Hewson, Investments Manager, RaboDirect Australia and New Zealand said:

“Term deposits are increasingly becoming a key part of SMSF strategies. This is largely due to the continuing uncertainty in the global economy and the local share market. In such an environment, the cash hub in SMSFs has become of significantly greater importance to trustees who search for certainty, stability and safety.

“Clearly for trustees nearing retirement, liquidity is key and for those investors the length of the term is very important.

“Historically, we have found that term deposits appeal to an older, more risk averse customer. Interestingly, we are now seeing younger people turning to term deposits due to the certainty of returns. With continuing speculation that the RBA will cut interest rates again before the year’s end, locking money away in a market leading term deposit now can help reduce the impact such a cut will have on cash savings.

“As well as the fundamental appeal of guaranteed returns, there’s another security factor at play here. A recent report from the Australian Crime Commission showed that financially literate, educated middle-aged men are the prime targets of fraud, often as a result of chasing high returns and signing on to fake investments lured by fancy websites or brochures. Trustees can be reassured by the safety provided by the financial institutions offering term deposits – in terms of their return profile, the Australian Government Deposit Guarantee as well as the anti-fraud measures that online banks such as RaboDirect have in place to ensure that our customers funds are kept safe.”

Key points

• In the last 12 months, investments in RaboDirect’s 5 year term deposits have more than doubled
• Year on year the proportion of RaboDirect 5 year Term Deposits invested by SMSFs has increased by over 80%
• Interestingly the greatest growth in 5 year Term Deposits for SMSFs has been from those aged under 50, with the most significant increase coming from those aged 20-30 and 30-40.
• Three-month terms have also seen an jump in popularity in over the past  year, likely resulting from customers switching from cash to term deposits to maintain liquidity and improve short term yields.

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